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ESSAYS AND SPEECHES 







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J ESSAYS AND SPEECHES 



BY 

CHARLES G. DAWES 



WITH EXTRACTS FROM THE JOURNAL OP 

RUFUS FEARING DAWES AND AN ADDRESS UPON 

THE ARMY OF THE POTOMAC BY 

GENERAL R. R. DAWES 



With Portraits J 




BOSTON AND NEW YORK 
HOUGHTON MIFFLIN COMPANY 

1915 



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COPYRIGHT, I915, BY CHARLES G. DAWES 



ALL RIGHTS RESERVED 



Published September IQ15 



SEP 27 1315 

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CONTENTS 

Tribute to Rufus Fearing Dawes by his Father, 
with Extracts from his Journal 1 

Address on the Army of the Potomac, by General 
Rufus R. Dawes . 10 

Why the Small Investor loses (1907) 19 

Trusts and Trade Combinations (1899) .... 25 

The Sherman Anti-Trust Law: why it has failed, 
and why it should be amended (1906) .... 33 

The Defects of the Sherman Anti-Trust Law and a 
Defense of the American Business Man (1907) . 41 

Business and the Supreme Court Decision (1911) . . 53 

The Trust Problem (1911) ........ 57 

Address at the H. M. Byllesby Banquet, at the 
Chicago Club, in Chicago, June 29, 1911 . . .65 

A Forecast of General Business for 1904, with Com- 
ments on Panic Periods in the United States . . 74 

Corporation Reform: Practical Problems for the 
Investing Public (1905) 80 

Against Insurance of Bank Deposits (1908) ... 95 

The Issues of the Campaign (1900) 100 

The Question of the Hour: Business Prospects (1914) 116 

The Dangers of the Federal Reserve Law in its 
Present Form and how it should be amended to 
avoid them (1915) 128 



vi CONTENTS 

Argument on the Stevens Maximum Rate Bill be- 
fore the Committee on Railroads of the Nebraska 
State Senate (1891) 141 

Nebraska Railroad Rates: Argument before the 
Board of Transportation of Nebraska, August 13, 
1891 . . . . . . .154 

The Outlook for Currency Reform (1899) . . . 186 

The Rufus F. Dawes Hotel (1914) 193 

Investigations and Recommendations relative to 
Bank-note Currency (1898) ....... 195 

Recommendations relative to Bank-note Currency 
(1899) 248 

Amendments to the Banking Laws recommended by 
the Comptroller of the Currency (1900) . . . 270 

Proposed Changes in our Banking Laws (1903) . . 299 

Dangers of the Initiative and Referendum (1911) . 319 

The National Reserve Association is not a Central 
Bank (1911) 326 

Address before the Committee on Banking and Cur- 
rency of the House of Representatives at a 
Hearing on the Aldrich Bill (1908) .... 330 

The Banking Power of the Middle West: why 
Chicago is Great as a Banking Center (1909) . . 411 

Index 417 



ILLUSTRATIONS 

Charles G. Dawes Frontispiece 

Rufus Fearing Dawes 1 

Born December 12th, 1890 

Died in the waters of Lake Geneva 

September 5th, 1912 

General Rufus R. Dawes (1838-1899) 10 

Brevet Brigadier General, U.S.V., Iron Brigade 
Member of Congress 

BATTLE RECORD 

Rappahannock, Gainesville, Bull Run (2nd), South 
Mountain, Antietam, Fredericksburg, Fitz-Hugh 
Crossing, Chancellors ville, Gettysburg, Mine Run, 
Wilderness, Spottsylvania Court House, Bloody 
Angle, North Anna, Totopotomoy, Bethesda 
Church, Cold Harbor, Petersburg Mine Explosion. 



RUFUS FEARING DAWES 

Born December 12th, 1890 

Died in the waters of Lake Geneva 

September 5th, 1912 



ESSAYS AND SPEECHES 

TRIBUTE TO RUFUS FEARING DAWES 

By HIS FATHER 

(Read at the funeral by Rev. W. T. McElveen) 
The most of those here assembled are the personal 
friends and acquaintances of my dear son. So far as the 
outer world is concerned, his promising life, cut off so early, 
must ever be wrapped in obscurity. But I, his father, owe 
him one last and solemn duty, to project the high lesson of 
his life, as far as lies within my power, by using this last 
assemblage of his friends, when their minds and grieving 
hearts will the more indelibly receive the final impressions 
of his memory. 

Rufus's business career covered his last four summer va- 
cations, dedicated voluntarily by him to preparation for 
his life's work. Passionately fond of sports and of social 
recreation, to which the college work of the balance of the 
year legitimately entitled him, he gave them up and spent 
in the comparative solitude of a small engineering corps 
in western South Dakota his summer vacation of four 
years ago. Here he lived uncomplainingly a life of terrible 
hardship, without my knowledge until it was over. Every 
man in the corps went down with malignant typhoid fever. 
Rufus was the last man up, and for days, while suffering 
with the fever himself, took charge of and ministered to 
the balance of the camp, finally succeeding in moving them 
to a place of comparative comfort. He then temporarily 
collapsed, only to pull himself together again, and, alone 
and sorely stricken, set out on the long journey home. It 



2 ESSAYS AND SPEECHES 

is hard to speak of the suffering of the fifty-mile wagon trip 
to the railroad station, of his long wait there, of the terri- 
ble railroad trip home when he was unable to sleep or eat, 
and of his final arrival, which was our first knowledge of 
his trouble. For weeks, without a word of complaint, he 
fought the fight of life and death, and then, when relief and 
apparent convalescence came, it was only to usher in a 
relapse for as long and severe a second attack. 

Gaunt and haggard, yet happy and cheerful, he finally 
left the sick-room. He saved out of his compensation for 
his surveying work the sum of sixty dollars. Of his own 
initiative and without suggestion, he devoted this money 
to the following purposes: He made a close contract with 
his friends in the wholesale department of Jevne & Com- 
pany for twenty baskets of provisions at one dollar each, 
which, on Christmas Day, he personally delivered at the 
houses of the poor. Of the remaining forty dollars he ex- 
pended twenty dollars for a Christmas present for his 
sister, and kept twenty dollars for his personal use. 

The next summer, with his dear friend Melvin Ericson, 
he went to Seattle and took a position in the gas company 
in which my brothers and I are interested. The superin- 
tendent, who is one of our personal friends, endeavored to 
persuade the lads to accept salaries large enough to enable 
them to live at the best hotel; but Rufus and Melvin de- 
clined upon the score that their services would not fairly 
command the sum offered, took a lesser one, and secured 
board and lodging elsewhere for twenty-five dollars per 
month each. 

The next summer vacation Rufus spent in the wholesale 
plumbing establishment of his close friend, Donald Ray- 
mond. With his characteristic masterfulness, he announced 
to Donald that he would fix his own salary at sixty dollars 
per month, which he believed he could earn in the sales 



RUFUS FEARING DAWES 3 

department. In this place each month he turned profits 
into the firm amounting to two or three times his salary. 

This present summer he spent in the gas works at Chi- 
cago Heights under the tutelage of his friends, Walter F. 
Booth and Verne Cutler. During the hot summer days, 
with the temperature 110 degrees Fahrenheit in the gas 
house, Rufus Fearing learned to make gas. He also mas- 
tered gas analysis, and in the last week of his work was 
given charge of the entire plant. 

The last two weeks of this present vacation, which 
proved to be the last two of his life, he gave up to recrea- 
tion, with the great nervous energy with which he did 
everything. 

But I pass now to the more important things. My boy 
was only in the beginning of his business career, while the 
career of which I am to speak is complete. The Lord gave 
him ample time fully and wholly to complete it. 

The truly great character must unite unusual strength 
and determination with great gentleness. My boy was 
imperious. He recognized no superior on earth, and yet 
was the tender and intimate friend of the weak and hum- 
ble. I have taken him with me among the greatest in the 
nation and looked in vain for any evidence in him of awe 
or even curiosity. He has taken me, asking me to help 
them, among the poor and lowly of earth. 

He loved his friends, and but recently told his mother 
that our house was all through the coming years to be the 
stopping-place for his college friends passing through the 
city. How grateful our lonely hearts will be to them now 
if they will only accept this invitation and sleep in his 
room and fill for a little time the empty chair. 

He commenced early in life to set himself against the 
crowd, for no man rises to real prestige who follows it. Of 
his own initiative, he joined the church. For a long time he 



4 ESSAYS AND SPEECHES 

taught a Bible class of boys at Bethesda Mission. He did 
not smoke, nor swear, nor drink. He was absolutely clean. 
Yet, in his stern opposition to the drift, he mingled toler- 
ance in just that quality which contributed to real power 
to be used in opposition, and for that purpose alone. He 
organized systematically rescue squads for weaker boys at 
college who were wavering before strong but evil leader- 
ship. Against the boy who sought to lead astray the 
weaker, he set his face like steel. 

Like every born leader he had his many warm friends, 
but if Rufus Fearing ever had a bitter enemy I have yet 
to hear of him. His kindness, sincerity, and good humor 
disarmed hatred. I never saw him angry. In twenty-one 
years he never gave me just cause for serious reproach. 

He was absolutely natural in any environment, great or 
humble. He was extremely ambitious. He was extremely 
proud. Upon one occasion, years ago, when I mistakenly 
reproached him, he patiently explained my error and then 
peremptorily demanded and received an apology from me. 

I have noticed that one of the characteristics of the thor- 
oughbred is the refusal to accept or recognize a handicap, 
which he always regards as a self-confession of inferiority. 
The man who accepts a handicap is beaten before the race 
commences. In any matter to which Rufus Fearing set 
himself seriously he saw no possible measure of his full 
abilities or efforts except in the leading contestant. He 
recognized no victory in a second or third prize. It was not 
altogether modesty which kept him so silent about his 
marked achievements, but because a high average of pro- 
ficiency, which left the field far behind, only brought him 
into closer self -comparison with the few winners. The nat- 
ural leader in life, while he keeps his head, keeps his eyes 
only on the runners in front, and not on the multitude be- 
hind. That is why the truly great are so often humble. 



RUFUS FEARING DAWES 5 

His mother and I never knew, until we read it in the 
yearbook, of Rufus's athletic successes at Lawrenceville, 
or that he was captain of the fencing team at Princeton, 
or that he had this or that distinction. He never talked 
about his achievements in any line of work, study, or rec- 
reation, for the reason that he himself never regarded them 
as important or worth while. But with almost reckless 
intrepidity he sought in his friendly conflicts a contact with 
any exceptional individual he could find. In the fact that 
contact means comparison he saw only the opportunity for 
taking his own full measurement, even though it might 
prove disappointing or defeat prove bitter. 

But under these continuing and often disappointing con- 
tests, moral, physical, and mental, there worked out, under 
the inexorable laws of human nature, a splendid and com- 
plete young Christian gentleman. And the lesson of this 
complete life is that this can be done by a young man with- 
out his being a prig, without his failing to be a "good fel- 
low," without his bending to debasing environment. 

My boy lived long enough to "win out." Whatever the 
years would have added would be only material. In a 
man's character is his real career. 

He died suddenly in the midst of happiness. He died 
with his high ideals unlowered. He died with all the noble 
illusions of a high-minded youth undisturbed and undis- 
pelled. He died without having lost ambition, with his 
eyes fixed on the high mountains of life, where, beyond any 
question, had he lived, he would have climbed. 

But, dear young friends of my boy, he had already 
climbed the high and rough ways which lead up the steep 
mountain of character. He stood there firmly at the top. 
Mistake not. It was no easy victory. Material achieve- 
ment may be both; but no moral victory is ever easy or 
ever accidental. 



6 ESSAYS AND SPEECHES 

But yesterday strong and joyous in the full might and 
swing of buoyant youth, surrounded by his loving friends, 
the sun of his happiness high in the sky, Rufus Fearing was 
mercifully spared the sight of grim Death, whose unseen 
hand was even then upon his shoulder. But had this happy 
boy turned and seen him beckoning him away from the 
dear ones — from his home — from his parents and his 
sister — from the great battlefield of life, with its fine 
victories to be won, you know and I know, that without 
complaint, clear-eyed, unafraid, in simple, unquestioning 
faith, with hope and trust in his Lord, my dear son would 
quietly have followed into the darkness of the shadow. 



RUFUS FEARING DAWES 7 

After the death of Rufus Fearing Dawes, what follows 
was found written in the back of his little memorandum 
book under the dates given. To his definition of a gentle- 
man, written in his eighteenth year, he conformed in his 
own life. His thoughts on death were evidently prompted 
by his severe illness from typhoid fever in 1909. (C. G. D.) 

1909 
A gentleman is primarily a Christian. He respects the 
rights of, and his obligations to, his fellows. He under- 
stands his own relation to society, and does not overstep 
the bounds set by himself. He is not bound by the laws of 
society except in that they agree with the code picked out 
by himself. He is gentle, kind, courteous; returns good for 
evil; will go out of his way for the most besot of individuals; 
never mentions his benefits unless forced to, and then 
quietly. The gentleman is the attempt of this time to ac- 
commodate Christ's life to modern circumstances. 

1909 
Death is not an "enemy." It is the door by which God 
allows us to enter His sanctuary. It is not to be feared. 
When God wishes that we enter that door, it is not neces- 
sary for us to push it open. This is contrary to his com- 
mand. We cannot prevent our departure from this world. 
It is ordained from on high. All that we can do is to be 
prepared to go through that door at all times. If my God 
calls me, I pray Him to take me at His pleasure, and in such 
a way as to improve somebody else's passage towards His 
kingdom. 

1909 
One of the hardest things I have had to contend with 
was selfishness. This led to self-appraisement. In North 



8 ESSAYS AND SPEECHES 

Dakota, by having this paraded before me, I see the folly of 
it, and from now on I intend to improve constantly. Also 
the foundations of society are laid on truth. If a com- 
munity is made up of liars the credulous man is lost until 
he, too, follow in their steps. The alternative of safety 
is keeping self-respect until the respect of the others is 
gained. 

1910 
Happiness and sorrow are like two straws on a calm sur- 
face of water. They attract each other. Memories of dear 
little Martha Palmer are tinged with sadness only because 
she is gone. Her kindly, loving, open smile is always a 
symbol of happiness. Her death was a glimpse of Heaven's 
happiness shown on earth. Love to her was life. Life was 
all a joyful expression of tender girlhood. She knew no 
sorrow save that of others. Loved of all, and loving all, she 
left us. Sorrow is present. No! sorrow is banished for a 
sweet sorrowful happiness such as was taught by Martha 
Palmer. 

1910 
What is our real purpose in Life? To serve God with all 
our hearts. Yes, but what is His service? Self-sacrifice, aid 
to the needy and love. Love is the enveloping sanctuary 
which binds God to our souls and our souls to our human 
bodies. It is intangible yet omnipotent. Love reduces all 
beings to a common relationship which is bound with many 
ties. No sun but rises on love; no moon but sets on love. 
God is love and love surrounds us all. 

1910 
A memory is a sweet bit of tenderness unalloyed by 
hopes or fear. It is not a tangible thing. It is a gossamer 
tangle of incidents, faces, personalities, places; a shadow 



RUFUS FEARING DAWES 9 

lengthening into the darkness of forgetfulness; a gateway 
which opens the field of bygone days. Summer and sun 
and moonlight permeate these days. The dead are smiling 
happily into our faces — those whom we remember cherish- 
ing in our hearts. Memories are the sparkling headwaters 
of the stream of life — the froth and foam which floats 
away leaving the dark rushing tide beneath. 

1910 
The hardest thing about death, and it is the only hard 
thing, is that those left behind have to suffer. If I die, 
please remember, people, that I have striven for the best 
things in life as I knew them. God will give me credit for 
that, I hope, and grant that He may deal gently with me 
for offenses. However that may be, I am not afraid of 
death. 

1911 
Everybody is my equal. I have neither superior nor in- 
ferior. This is not socialistic, but social, as regards my 
present status of birth without anything acquired by my- 
self. My ideals are my own. Whether father and I have 
kept too much aloof will appear later. He has his ideas on 
the subject and it is enough. But however that may be, I 
have had to make my own code of ethics as regards so- 
ciety, and hence we start as equal. Whether we end on the 
same status remains to be seen. 

1912 
Dreams are phantom ships, wraithlike, helmless, swift, 
which glide erratically over the sea of sleep. 



ADDRESS ON THE ARMY OF THE 
POTOMAC 

By GENERAL RUFUS R. DAWES 

The following address was delivered at Cincinnati, Ohio, 
on the evening of April 7, 1881, at the annual meeting of 
the Society of the Army of the Tennessee. 

During the delivery of this speech and at its conclusion 
there were most remarkable demonstrations of apprecia- 
tion on the part of the audience. General Dawes's speeches 
were always delivered without notes, and this one was 
stenographically reported and is here given as printed in 
Volume XIV of the "Proceedings of the Society of the 
Army of the Tennessee." 

The speaker was introduced by General W. T. Sherman, 
and responded to the toast, "The Army of the Potomac: 
Patient of toils; serene amidst alarms; inflexible in faith; 
invincible in arms." 

Gentlemen of the Army of the Tennessee : — 

You soldiers of the West have your hard-earned vic- 
tories. On a hundred fields you scarcely knew defeat. 
Perhaps, more strictly speaking, on three hundred and 
sixty-five; for it has been said that you have a battle an- 
niversary for every day in the year. You have the for- 
ward sweep of your banners across the land, from the 
Mississippi to the ocean. You have given from your ranks 
leaders whose immortal deeds will forever mark historic 
epochs of the war. These are your distinctive honors. They 
were fairly won, they are well deserved, and, as I see in the 
badges all around me, they are, as they should be, proudly 
worn. 



RUFUS R. DAWES (1838-1899) 

Brevet Brigadier General, U.S.V., Iron Brigade 

Member of Congress 

Battle Record — Rappahannock, Gainesville, Bull Run (2nd), 
South Mountain, Antietam, Fredericksburg, Fitz-Hugh Crossing, 
Chancellorsville, Gettysburg, Mine Run, Wilderness, Spottsyl- 
vania Court House, Bloody Angle, North Anna, Totopotomoy, 
Bethesda Church, Cold Harbor, Petersburg Mine Explosion, 




^L< A^" c /(/ZZ-z^<-^ 



THE ARMY OF THE POTOMAC 11 

In rising before you as a representative of that body of 
soldiers called in history the Grand Army of the Potomac 
[applause], to stretch my hand across the historic chasm to 
the representatives of that grand army of the West, the 
Army of the Tennessee [applause], I should do grave in- 
justice to the survivors of that army of the East, if I failed 
to express our profound admiration for the grand achieve- 
ments of the famous army of the West. [Applause.] But, 
fellow-soldiers, we representatives of the Army of the 
Potomac have a pardonable pride in the distinctive honors 
of our army. [Applause.] Our honors do not trench upon 
yours. As far as the east is from the west, so far was our 
history in its beginning, in its course and in its conditions, 
removed from yours. More men fell upon the field of battle 
action of the Army of the Potomac than from the ranks 
of any other army of the nation. [Applause and voices, 
"That's so, that's so."] Nevertheless, bloody repulse 
rather than glorious victory was the rule in our battle his- 
tory. But defeat left no demoralization, no discouragement; 
and sublime fortitude and unflinching endurance glorified 
every field that was lost. [Applause.] It was this battle 
quality, broken by no disaster, discouraged by no defeat, 
that rose to the crisis of the war, and even-handed upon 
open field of battle wrested victory from the strongest and 
best-led army ever put into the field by our enemy, and 
that victory saved your nation. [Applause.] It was this 
unparalleled tenacity that applied the death-hug to the 
rebellion, commencing at the Wilderness and squeezing the 
life out at Appomattox. Marching through a sea of blood 
and across a wilderness of defeat, it was still the Army of 
the Potomac that brought the nation in sight of the prom- 
ised land at Gettysburg [applause] and carried it over 
Jordan at Appomattox. [Renewed applause.] 

It is but a glance that can be given at its history to-night. 



n ESSAYS AND SPEECHES 

Strange conditions commenced your war. The distin- 
guished orator of last night very ably presented them. 
The soldier of the Southern army marched to the first Bull 
Run fight with the utmost confidence of victory, because 
he believed one Southern man could whip five Yankees. 
The Northern soldier marched to that absurd field with 
the same confidence in victory, because he believed Secre- 
tary Seward's proclamation that ninety days would end 
the war, and the only thing that he was afraid of was that 
somebody would get there and crush the unholy rebellion 
before he had a chance. [Applause.] These conditions 
brought to that battlefield zeal without order, enthusiasm 
without discipline, bravery without the touch of the elbow, 
and they crumbled to dust in the heat of action, and both 
armies had disintegrated before the battle had commenced. 
[Applause.] But the defeat was ours, and an appalling 
calamity was inflicted upon our cause. The stinging dis- 
grace upon our pride brought overwhelming conviction that 
instruction, discipline, and drill were essential conditions 
to effective action of an army, and, in a word, they are and 
ever will be. 

But the Army of the Potomac was the victim of an ex- 
aggerated policy in that direction [applause] — a season of 
masterly inactivity when all was quiet on the Potomac fell 
upon us [applause and laughter] — a strategic condition 
which Horace Greeley called "rooted inaction," and it was 
amenable to the criticism of your distinguished President 
to-day, because under that system it was high treason to 
steal a chicken. [Applause and laughter.] So, until the 
spring of 1862, after you men of the glorious Army of the 
Tennessee had marched down and placed your victorious 
banners upon Donelson and electrified the nation with the 
conviction that there was some virtue in God-like action, 
we were still sticking in the mud; and when you had 



THE ARMY OF THE POTOMAC 13 

marched forward to that field commemorated to-night, the 
flaming field of Shiloh, and fought upon it, we had only got 
to creeping in the ditches at Yorktown. 

Nevertheless, the battle quality of the army developed 
beyond doubt in the camps of instruction. It was sweet- 
ness long drawn out. It showed itself in the heroism of the 
Seven Days' struggle, and flashed to brilliancy at Malvern 
Hill. [Applause.] 

This ends the first epoch of the history of the Army of the 
Potomac. Now comes what we called a "change of base" 
in the old days. The failure of the Peninsular campaign 
made it necessary to change our base to cover a beleaguered 
Capital, and the corps were scattered, and some of them, 
under the heroic leadership of a Kearny, a Reynolds, a 
Reno, and a Hooker [applause], reached the field of battle 
of another commander, and for that leader and their coun- 
try fought like heroes. Another leader of a corps reached 
the field also, and gallantly halted and heroically engaged 
in the bloodless reconnoissance of a cloud of dust, and if 
we may believe some of the official records of the Govern- 
ment, he is likely to be handed down in history as the hero 
of that day who saved the army by not fighting, and as the 
most prescient general on the field. Another corps general, 
marching to the sound of cannon, every report of which was 
an appeal from the battle front to comrades to come for- 
ward, rushed to the rescue six miles a day [laughter] ; and 
the commander of our grand army sent words of cheer to 
the commander at the battle front that he would reinforce 
him with every wagon he had if he would send him cavalry 
for an escort. [Laughter and applause.] But the army 
raised up the fallen banner and marched forward to repel 
an invasion made possible by the failure to join these two 
columns, for which the stern judgment of history will hold 
somebody responsible; and in the victorious sweep of our 



14 ESSAYS AND SPEECHES 

lines over South Mountain, and the gallant but desperate 
struggle upon the field of Antietam, there was victory for 
the army, vindication for our men, and honor for our first 
commander. 

I will hurry up, now. [Cries of "No, no; go on, go on."] 
We changed commanders, and the black cloud of defeat 
at Fredericksburg rolled over the army, but it was a cloud 
illumined by the heroic struggles of our men against fate. 
No finer example upon the history of war is recorded of 
men giving life for honor, where there was no hope of vic- 
tory, than is afforded by the heroism of men against the 
stone wall at Fredericksburg. But that defeat is relieved 
by the skillful withdrawal of a hundred thousand men 
across a deep river in the face of a successful army, and it 
is glorified by the noble courage of Burnside, who could 
say, "For the failure of this attack, I am responsible, not 
my army." 

And we changed commanders again. [Laughter.] After 
a winter of splendid preparation, Joe Hooker took the head 
of [loud cheers] the finest army on the planet, made so by 
his reorganization and inspiration, and crossed the Rap- 
pahannock River. There was a prestige of victory in the 
name of Hooker. He was an Apollo at the battle front, and 
along our lines in the heat of action, like the white plume 
of Navarre, his gallant form had ever been seen. 

"Hooker 's across, Hooker 's across, 
River of death, you shall make up our loss; 
Up from your borders we summon our dead — 
From valley and hill-top where they struggled and bled — 
To joy in the vengeance that traitors shall feel 
In the roar of our guns and the rush of our steel, — 
Hooker 's across!" 

Gallant Joe Hooker! His defeat was as crushing as unex- 
pected. 

But the last shall be first; no question, the last com- 



THE ARMY OF THE POTOMAC 15 

mander of the Army of the Potomac will stand first upon 
its scroll of historic names. He came not exactly like a 
thief in the night, but just as suddenly and unexpectedly. 
He said the assignment was totally unexpected and un- 
solicited by him. I can say that it was totally unexpected 
and unsolicited by the army, but almost like Lincoln, 
Meade proved to be the man for the crisis, and not only 
does the glory of Gettysburg crown his career, but tried in 
the crucible of the campaigns, the battles of his army from 
Gettysburg to Appomattox, he will stand before the world 
as a successful commander, great in his achievements as 
he was modest in his personal pretensions. [Applause.] 

Now I am done with the history of the Army of the Po- 
tomac, and, indeed, is there more distinctive history after 
Gettysburg? Do I not see before me flashing in these 
badges the star that shone above the clouds at Lookout? 
[Applause.] It shines here, a star of the West, but is it not 
a star of the East, also? [Loud applause.] Under the leader- 
ship of Hooker and of Howard, those men, veterans of the 
old Army of the Potomac, went West to help you. [Ap- 
plause.] Our comrades on the field of blood will claim an 
interest in their Western glory. 

But you men of the West sent us help, too. You repaid 
the debt in kind and with high interest, for there came to us 
from you the man who had reached the command of all 
the armies of the nation [applause] and upon whom there 
rested all hopes of the nation. To our field of action he 
transferred the titanic death-grapple of the rebellion. 
Under his leadership we fought it out on that line all sum- 
mer. [Cheers and loud applause.] The tenacity, heroism, 
and devotion of the Army of the Potomac, marching 
through a sea of blood, crowned that leadership with Ap- 
pomattox and the nation with peace. And you sent that 
right arm of power of that great leader, Phil Sheridan, and 



16 ESSAYS AND SPEECHES 

Fisher's Hill, Five Forks, and marvelous pursuit of Gen- 
eral Lee were among the laurels in his chap let; and you 
did more. Almost had the two columns and the grand 
armies of the East and of the West united, when victory 
and peace crowned the common effort. Was not this the 
strength of the East and the strength of the West striving 
together, triumphing together in a common cause for a 
common nationality — for the United States? [Loud ap- 
plause.] 

United in the glory of a restored nation, the two armies 
marched together in final review, they dispersed and army 
lines were forever broken. They remain only upon the 
records of history and graven upon the hearts of the men 
who followed their several banners. But soldiers of all 
armies remain a common brotherhood, cemented by a com- 
mon devotion to a nation restored by their united achieve- 
ments. For that nationality may they ever stand; to that 
may this occasion inspire them; and may their example so 
inspire their children and their children's children. [Long- 
continued applause and cheers.] 



THE ARMY OF THE POTOMAC 17 



August, 1899. 

In writing these few lines of tribute to the dear father 
who has passed from us, I am overwhelmed with a flood of 
recollections of his love and tenderness, of his self-sacrifice 
and generosity in all his family and social relations. With 
his family, such recollections will always be predominant, 
and their recital at this time, when their wounded hearts 
still ache at the recent bereavement, would only bring 
unnecessary pain. It is not so much of the loving father, 
whose hearthstone was his happiest resting-place, and 
whose constant thought was of the comfort and success and 
education of his dear ones, that I wish now to speak, but of 
that strong and noble character of his which looked every 
duty straight in the face and which subjected his every 
action, public or private, to the dictates of a clear and clean 
conscience. He was so strong and he was so sincere. He 
never evaded an issue; and never apologized for his deci- 
sions. His constant and consistent teaching to his children 
was, that above all things of the world — above wealth, 
above fame, above pleasure — must be placed character. 
By example and by precept he endeavored to encourage 
them to meet disagreeable issues squarely, and under all 
circumstances to tell the truth. And the tenderness which 
characterized his every action in his domestic relations 
demonstrated his genuineness and sincerity of purpose 
when he imposed high standards of conduct. 

Among all those I have known in life, I have known no 
one who would make a greater sacrifice for the sake of a 
moral principle, or who, in the time of temptation or per- 
plexity, would more courageously tread a painful path of 
duty. 

Taken all in all, in spite of the rest he found within the 
peaceful haven of his home, his life was storm-tossed. 



18 ESSAYS AND SPEECHES 

He had few pleasures as a child, and the awful battle 
experience of the "Iron Brigade" left him a young man 
prematurely old. Business adversity did not spare him in 
his earlier career; and the rewards of his civil and military 
life, so splendidly devoted to his country, were commen- 
surate neither with his abilities nor his ambitions. Yet 
who of us ever heard this intensely earnest man utter one 
word of complaint or disappointment? And when, at what 
should have been the climax of his life, — when in the 
course of political and commercial events his turn for more 
marked civil achievement seemed at hand, — when he was 
struck down in his strength and confronted by hopeless 
invalidism, his words and every action were those of calm 
and cheerful resignation. 

That day with its darkness and pealing thunder when 
we gathered for the last time around his body, covered with 
the flag for which he had fought so well, — that day so 
heavy in our memories, — was in itself typical of his life, 
for as we left him in the evening, the clouds were lifted 
and the twilight was clear and peaceful and quiet like his 
strong and steadfast character, always thus amid the 
tumults of life. The memory of that character is our most 
precious heritage, and will remain with us always until the 
Heavenly Father calls us to follow him. 



WHY THE SMALL INVESTOR LOSES 

{Saturday Evening Post, April 20, 1907) 

It is little wonder, with the present growth of values in 
the country and the rapid increase in wealth, that the man 
with the small savings account feels like using it to secure 
for himself a greater participation in prosperity than that 
afforded by three per cent interest. That there is now 
widely prevalent among our people of moderate means a 
mania for the investment of small sums in hazardous and 
fraudulent enterprises is unquestioned. The purpose of 
this article is to warn prospective small investors against 
the " get-rich-quick " plans with which they are beset. 

I believe that in the vast majority of cases moderate 
sums of money cannot be invested safely so as to bring in 
more than a reasonable interest return and should not be 
invested in response to specious newspaper advertise- 
ments. The small investor generally overlooks the advan- 
tages which the capitalist has as compared with himself. 

In the first place, the capitalist, in making an invest- 
ment, is generally in the position of being desirous of buy- 
ing from others. The small investor is in a position where 
others are desirous of selling to him. The capitalist buys 
where he can buy cheap, whether the seller is making a 
profit or not. 

The small investor, in answering a published invitation 
to buy, is always paying a profit to the seller. One should 
remember, when he is reading a newspaper advertisement 
of stocks, that he is being asked by a stranger to buy some- 
thing at the stranger's price. 

There is no reason why the stranger should offer him an 



20 ESSAYS AND SPEECHES 

exceptional bargain. Exceptional bargains in these days of 
prosperity do not, as a rule, go begging. The capitalist, if 
he buys at a profit to others, generally knows what that 
profit is and measures it in its relation to the profit which 
he hopes to realize on the purchase. The large investor 
generally knows what the profit of the seller is. Where the 
seller fixes his own profit, it is almost always larger, other 
things being equal, than the amount of profit which results 
from negotiation. In the majority of proffers of mining 
stock through newspapers, the man who buys is paying a 
profit fixed by the seller for his own benefit. Large capital 
makes a preliminary investigation at its own expense. The 
small investor either acts upon no investigation, or upon 
an investigation paid for by the seller. Large capital nego- 
tiates for a price with the true value in mind. The small 
investor generally buys without knowledge of the true 
value. 

What chance has the small investor? You know nothing 
from the advertisement as to whether the promoters are 
men of past business success. Many men who are known 
business failures in their own communities are often long- 
distance millionaires. Often they are broken plungers 
whose brief success was widely chronicled, but whose 
gradual business relapse has naturally not been heralded. 

Do not put too much faith in what names seem to mean. 
Find out, by inquiry from some one who knows, just what 
they do mean. If you have no way of finding out the char- 
acter and past business record of the men, do not invest. 

A banker in one of our great city banks once asked a man 
to invest some of his personal funds in his own business. 
The latter had a business which, though very successful, 
was not one of great magnitude. He had never had any 
business relations with the banker or his bank. Naturally 
surprised, the business man asked the banker why he 



WHY THE SMALL INVESTOR LOSES 21 

selected him and his business, in view of his close relations 
to the great business leaders of the city. The banker re- 
plied: "Because you are successful, and it is your business. 
I am almost daily asked by business men to join them in 
outside ventures, but they won't take my money in their 
own business. When I join a coterie of men in an outside 
investment, as an almost invariable rule we all lose; and 
yet every one of us may be a success in our own business. 
I have had so many experiences of this sort that if even 
Marshall Field should have asked me to join him in a man- 
ufacturing business or a mining venture, I should have 
declined. But if he had said : * Put some of your money into 
my business,' I would have given him all I had. Now men, 
when they are far along in business, do not want, as a rule, 
to take outside money in such form as to largely share the 
results of their work with others. Naturally, if they need 
money, they borrow it and pay interest on it without shar- 
ing profits beyond that extent." 

There is a deal of philosophy in this banker's statement. 
A coterie of business men who "take a flyer," as they call 
it, can generally afford to lose, and generally do. 

Out of all this let us deduce a rule: Try to invest your 
money with successful business men in the business in 
which they have succeeded. 

In reading a newspaper advertisement of stocks, do so 
always with a skeptical spirit, just as you would regard a 
strange individual who would call at your house claiming 
to be able to sell something at less than its real value. If 
you see something in the advertisement which tempts you 
to invest, you will, unless you are a fool, investigate the 
advertised proposition as you would the proposition made 
by a stranger. These are some of the proper questions upon 
which your mind should be made clear: "Who are you, who 
offer the stock?" "As you ask me to regard your repre- 



22 ESSAYS AND SPEECHES 

sentations as trustworthy, refer me to those of whom I 
know, who will vouch for your character and trustworthi- 
ness." "As you are offering me stock in a company, please 
tell me in percentages how the stock is allotted." "What 
per cent of the total stock has gone to the people who 
formerly owned the property bought by the corporation?" 
"What per cent of the stock represents good-will?" 
"What per cent of the stock is sold for cash like that you 
propose to sell me? " "To whom does the cash go — to the 
company's treasury, or to buy stock already issued for 
good- will to others?" "What is the relation of the cash 
cost or selling value of the property of the company to the 
amount of its stock issues?" "Has it ample working capi- 
tal?" "What is its indebtedness?" "Are its titles or 
patents in dispute?" "What are the salaries of its offi- 
cers?" 

Now these questions would be only some of the pre- 
liminary questions which the experienced investor would 
ask before taking up the equally important ones relative 
to the nature, condition, and prospects of the business it- 
self. How much of this kind of information have you, who, 
after reading the flamboyant advertisement in the paper, 
fill in for a few dollars the coupon application for mining or 
plantation stock printed in the margin of the advertise- 
ment? Poor fool, — the man who follows off a bunco- 
steerer is more excusable than you. He has at least had the 
opportunity of passing a hasty judgment upon the per- 
sonal appearance of the scoundrel who is after his money. 
You are simply biting on a hook with the bait half off, 
without even seeing whether the fisherman looks benevo- 
lent. How chary is the fool of displaying his folly? 

These are the days when bankers listen to the con- 
fidences of the unfortunates who have been buying stocks 
on "straight tips" and who bring in their remaining sound 



WHY THE SMALL INVESTOR LOSES 23 

collaterals to borrow enough to pay up their losses to the 
brokers. How quiet they are — these same men who were 
telling a few months ago how they bought this or that 
stock upon which their judgment had been vindicated by 
this or that profit. We hear of the successes; but of the 
failures, which outnumber them, we seldom hear except 
when stern necessity reveals them. But our sympathies 
are not so much excited by this class of fools. 

I know a poor scrubwoman who invested five dollars in 
one share of doubtful mining stock in answer to a news- 
paper advertisement. The secretary who opened the mail 
in which the letter was received, if he was honest, must 
have felt like reaching for his employer's sneaking face with 
a strong right arm and a doubled fist. 

Bloodsuckers, scoundrels — these names sound too mild 
for such men. Before the eyes of an honest and experi- 
enced business man, they would cringe and whine like 
an egg-sucking dog caught in the act. 

And what is the result? Led like sheep to the slaughter, 
a long procession of the misguided poor are parting with 
the savings which have been made possible by the most 
magnificent season of prosperity the nation has ever 
known. Many a poor wretch, drawing his savings-bank 
account now, in the hope of getting rich quick, will, in the 
coming years of industrial depression, wander the streets 
of our cities without work and without bread. God give 
us common sense. 

This is a hard world in business. It always has been, 
and always will be. There are many good and generous 
men in it. There are many who will lend a helping hand 
to you in your adversity, but in time of need you will not 
find them among the men who tried to get you to embark 
in speculation with your little surplus, and to sell you some- 
thing which would help you to "easy money." 



24 ESSAYS AND SPEECHES 

Be self-reliant. Make your own investigation in invest- 
ments. When you cannot, put your money in a good sav- 
ings bank. Distrust the financial demagogue. Keep your 
hand on your pocketbook as you travel through life — 
first, to always give in proportion to your means to those 
who are poorer; second, to hold from those who would 
take through force or fraud what you need for yourself and 
yours. You will then have your hand where most other 
fellows have only their eyes. In this alone you will have 
the advantage of them. 



TRUSTS AND TRADE COMBINATIONS 

(Address delivered at the Annual Meeting of the Merchants' Club of Boston, 
October 17, 1899) 

The rapidly changing form of the commerce and manu- 
facturing of the country is bringing new questions before 
the people for discussion and action. The past year has 
witnessed an acceleration in the general movement to- 
wards the concentration of business enterprise in the 
United States, which has aroused public attention and 
created a just demand for the more intelligent legislative 
treatment of existing industrial conditions. 

A general feeling of public uneasiness and apprehension 
has been caused by the recent combination into single 
corporations of a large number of heretofore independent 
and competing concerns for the purpose of controlling 
entirely their respective lines of trade and manufacture. 
Some of the stronger of these corporations have been or- 
ganized without recourse to an issue of bonded indebted- 
ness, and in consequence a period of small earnings here- 
after will not of necessity involve them in the demoralizing 
effects of mortgage foreclosure. The prospect that these 
stronger corporations will fall to pieces of their own weight, 
as have some heavily capitalized corporations heretofore, 
is not likely. When that measure of competition exists 
which secures to the consumer the benefit of the savings 
incident to a limited combination of productive effort and 
capital, we willingly recognize the advantage of the cheap- 
ened cost of production and distribution resulting to the 
community from such combination. 

But in this country we are now face to face with this new 
condition — that combination of effort and capital, which, 



26 ESSAYS AND SPEECHES 

under competition, has up to this time been steadily re- 
ducing the cost of certain articles to the consumer, has 
now reached a point where, by the combination of all the 
remaining competitors, the further reduction of cost of 
these articles, if not the question of an actual increase in 
the cost, is a matter dependent upon the will or caprice 
of those in charge of the combinations controlling the busi- 
ness in these articles. 

Such power, owing to various reasons, may not now be 
in the hands of all such corporations. If, however, it is in 
the hands of even a few, it is because of industrial tenden- 
cies which, under the law of evolution, may bring similar 
power to an increasing number, and the possible results of 
this condition properly challenge public attention. 

The organization of business corporations is, of course, 
for the purpose of profit, and, other things being equal, we 
cannot expect a company which can exact a higher price 
to sell at a lower price. It is not fair to assume, therefore, 
from the fact that falling prices in certain lines of business 
have been characteristic of an industrial system under 
which competing corporations have been growing larger, 
stronger, and fewer in number, that falling prices will con- 
tinue when the remaining corporations have combined and 
destroyed competition. 

From a public standpoint we are justified in construing 
the large capitalization of these corporations, equaling on 
the average several times the cost of duplication of the 
constituent properties, as conclusive evidence of their pur- 
pose to secure, as far as possible, for their stockholders the 
saving in the cost of production and distribution which 
combination creates. 

The principal objects, which would naturally be sought 
by those endeavoring to entirely control for purposes of 
profit a system of manufacture in the United States, would 



TRUSTS AND TRADE COMBINATIONS 27 

be to buy cheaper through the elimination of competing 
buyers of raw material and to sell dearer through the elim- 
ination of competing sellers of the finished product. In 
addition, they would seek a profit from the savings result- 
ing from simplification of the methods of operating the ma- 
chinery of production and distribution. It is in the former 
purposes and not in the latter that there exists alike the 
necessity and justification for governmental interference. 

There are many who still think that the remedy for any 
extortion or abuse which such corporations may inflict lies 
in a competition which will immediately spring up when 
such abuses exist; but the ordinary observer of present 
conditions realizes the growing embarrassments surround- 
ing the inception of competing efforts, and while he admits 
there are many of these present corporations whose power 
will be regulated, if not by the actual existence, then by the 
practicability of competition, he feels that with an in- 
creasing number of such corporations this is not the fact. 

In looking for the causes of present industrial condi- 
tions, the fair and candid man finds them beyond political 
parties and beyond the legislation supported by these 
parties. The growth of these commercial enterprises may 
have been retarded by some legislation and accelerated by 
other legislation, but primarily it has had its foundation 
in natural causes, and has proceeded in accordance with the 
natural laws of progress under a competitive system. 

It is human nature to seek to acquire, and it is human 
nature to combine to acquire. It is human nature and not 
any political party which is responsible primarily for the 
existence of the trust; yet I cannot agree with those who 
maintain that this is not a political question. That the so- 
called trusts are the natural outgrowth of the practically 
unrestricted and unregulated law of commercial competi- 
tion, and not created by reason of the former attitude of 



28 ESSAYS AND SPEECHES 

any political party, I maintain; but I maintain also that 
the question of the proper legislative treatment of these 
great combinations and corporations, formed for the pur- 
pose of monopolistic control of the production and dis- 
tribution of some of the necessaries and comforts of life, 
is one of the greatest and most practical which has ever 
confronted the political parties of the nation. I do not 
think that, where there is a practically unregulated power 
on the part of a trust to control the prices of certain com- 
modities, there is any considerable portion of either politi- 
cal party which believes that there should be no legislation. 
The division which will manifest itself among the people 
of the country will not be between the people who believe 
that something should be done and the people who believe 
that nothing should be done, but between the people who 
believe in seeking one remedy as against the people who 
believe in seeking another. 

Rather than have in the hands of any corporation the 
power to absolutely fix the price of a necessary of life at 
an arbitrary figure, the people of the United States will 
eventually and rightfully do one of two things: they will 
enact legislation for the protection of the people from ex- 
tortion, by a governmental regulation more or less extended 
as public necessity may require, or they will enact legisla- 
tion for the enforced creation of competition by the disin- 
tegration of trusts. 

With nothing less than one of these two things will or 
should the people of this country be satisfied. 

The seriousness of the problem cannot be overstated, 
and our hopes of its successful solution lie in the candid 
and honest consideration of the great people. At present 
it is as much the fear of what may occur as dissatisfaction 
with the results of what has occurred which is the just 
basis of the public desire for legislation. 



TRUSTS AND TRADE COMBINATIONS 29 

The hesitation which some honest men feel in advocat- 
ing legislation for the dissolution of trusts, as distinguished 
from their regulation, arises from the belief that the trust 
is but an unpleasant step towards a better condition of 
society, and that the solution lies in some form of regula- 
tion by Government which will preserve for the consumer 
a reasonable portion of any additional saving in cost which 
continued cooperation may create. 

The claim that there does not exist an inherent right in 
Government to control these combinations is one which 
cannot be admitted. The right of Government to interfere 
with and regulate monopolies is well recognized in law and 
practice. The laws forbidding combinations in restraint 
of trade, the laws regulating rates of corporations acting 
under granted franchises, and other laws of similar charac- 
ter all have their foundation in public necessity; and in 
the public necessity for protection from abuse, present or 
prospective, arising out of the existence of a monopoly in 
any line of trade, lies the legal and equitable foundation of 
the right of public interference. 

This Government is based upon the rights of the indi- 
vidual. The great strength and growth of the American 
people have largely resulted from the recognition of individ- 
ual rights; and it is indicative of the rapid change in com- 
mercial conditions that but a short time ago many of those, 
who now most earnestly advocate the passage of laws re- 
stricting and controlling combinations, feared that the 
passage of laws designed to curb them might result in un- 
due interference with rights of the individual. Our courts 
have carefully considered the relation of such laws to those 
rights of the individual which we hold so sacred, and in 
this connection I can do no better than to quote the words 
of Judge Finch, of the New York Court of Appeals, in the 
case involving the Sugar Trust. He says : — 



30 ESSAYS AND SPEECHES 

"It is not a sufficient answer to say that similar results 
may be lawfully accomplished; that an individual having 
the necessary wealth might have bought all these refineries, 
manned them with his own chosen agents, and managed 
them as a group at his sovereign will; for it is one thing for 
a State to respect the rights of ownership and protect them 
out of regard to the business freedom of the citizen, and 
quite another thing to add to that possibility a further 
extension of those consequences by creating artificial per- 
sons to aid in producing such aggregations. The individuals 
are few who hold in possession such enormous wealth, and 
fewer still who peril it all in a manufacturing enterprise; 
but if corporations can combine and mass their forces in 
a solid trust or partnership with little added risk to the 
capital already embarked, without limit to the magnitude 
of the aggregation, a tempting and easy road is opened to 
enormous combinations, vastly exceeding in number and 
in strength and in their power over industry any possibili- 
ties of individual ownership; and the State, by the creation 
of the artificial persons constituting the elements of the 
combination and failing to limit and restrain their power, 
becomes of itself the respoosible creator, the voluntary 
cause of an aggregation of capital which it simply endures 
in the individual as the product of his free agency. What 
it may bear is one thing; what it should cause and create 
is quite another." 

In considering the question of remedies and the means 
through which they should be sought, the difficulty of 
securing uniformity of State legislative treatment empha- 
sizes the necessity of additional Federal laws upon the 
subject. There seems at present an inadequacy of Federal 
law, and the Federal legislative powers should be invoked. 
In Congress, rather than in State legislatures, lies the hope 
of effective legislation which shall relate to the enforced 



TRUSTS AND TRADE COMBINATIONS 31 

regulation or disintegration of such existing combinations 
as may already practically control certain lines of business. 
Let us trust that Congress will now take up this great ques- 
tion. 

And here it may be said that in connection with the con- 
sideration of the remedies for abuses of trusts by Congress, 
laws should be passed protecting existing competition from 
unjust and unfair discriminations which result from in- 
fractions of the Interstate Commerce Law. 

The Interstate Commerce Commission in its report says : 
"There is probably no one thing to-day which does so 
much to force out the small operator, and to build up 
those trusts and monopolies against which law and public 
opinion alike beat in vain, as discrimination in freight 
rates." 

The importance of the reform in law which shall give 
the Interstate Commerce Commission power to prevent 
those discriminating rates which do such injury to small 
shippers is increased by its essential connection with the 
questions involved in the attitude of Government towards 
the so-called trusts and the problem of the proper method 
of protecting the public from the evils of trusts which Con- 
gress must face. 

In this new field of legislative effort it is unwise to ven- 
ture rash predictions or offer ill-considered and impracti- 
cable remedies. The important thing now is to start, and 
to start right, towards the solution of these questions. 

As the proper modification of the Interstate Commerce 
Law will inevitably become one of the precedents for gov- 
ernmental dealings with other monopolistic corporations, it 
is one of the logical starting-points for congressional and 
public effort in the solution of present industrial questions. 
Let this start be made, and may Congress give its earnest 
and conscientious thought and effort to the more general 



32 ESSAYS AND SPEECHES 

and more important problem of which this start will be but 
an incident. 

I believe the American people want these questions 
settled by conservative men and not placed in the hands 
of irresponsible pessimists. The growth of American com- 
merce and manufacturing has helped to make this the 
happiest and best land in the world. In that growth, prop- 
erly regulated, lie our hopes of national and individual 
prosperity. Our people believe that these questions, like 
other great questions which have arisen in this country 
before, can be settled in a manner which will not prove a 
barrier in the path of commercial and national progress, 
and that their protection can be accomplished without 
backward steps in social development. 

But they believe rightly that the taking of positive ac- 
tion against the present and prospective evils of trusts is 
one of the necessities of the hour, and that the question of 
the nature of that action is one of the issues now before 
them and to remain before them until properly settled. 

Let this great problem, upon whose proper solution de- 
pends largely the continuance of national and individ- 
ual progress, be settled by the optimist, and not by the 
pessimist — by the statesman, and not by the demagogue. 
Where there is right purpose there will be found right reme- 
dies, and we may be sure that under that Providence which 
has guided this people in so many times of crisis and per- 
plexity we will be led onward to the right. 



THE SHERMAN ANTI-TRUST LAW 

WHY IT HAS FAILED, AND WHY IT SHOULD BE 
AMENDED 

(North American Review, August, 1906) 

The Sherman Anti-Trust Law makes criminal "every 
contract, combination, etc., in restraint of trade or com- 
merce among the several States or with foreign nations." 

In its present form, during the sixteen years that have 
elapsed since its passage, it has proved a failure. If it is to 
be useful hereafter, it must be made to define what kind of 
agreements in restraint of trade are illegal, and to exempt 
from its provisions those trade agreements which, while 
they may be in restraint of trade, operate either for the 
public welfare or at least in a manner not injurious to it. 
This is the day of the trade agreement. We see all over the 
country, in different lines of business, district, city, state, 
and national associations of business men, formed for 
mutual protection and for the arranging of what might be 
termed the rules of trade. The business community al- 
ready knows that there are certain agreements in restraint 
of trade which keep alive competition, and that are aimed 
at keeping it alive. They seek to substitute, among business 
men, the "live-and-let-live" policy for the policy of unre- 
strained competition. Most of the evils against which we 
cry are the outgrowth of unrestrained and unregulated com- 
petition. There is much complaint at times that a large 
corporation will sell below cost in a particular locality in 
order to destroy the local competitor, and thus enable it 
later to exercise a monopoly. An agreement among com- 
petitors, therefore, not to sell below cost may, in some in- 



34 ESSAYS AND SPEECHES 

stances, be of public benefit, as preserving a larger area of 
reasonable competition. 

Of course, it may not be thus beneficial, but the point we 
wish to make is that a trade agreement, whether it relates 
to prices or otherwise, is not of necessity criminal; that it 
may have either a good or a bad purpose; that it may 
simply preserve private rights and privileges of trade not 
detrimental to the public; and that, therefore, the Sherman 
Anti-Trust Law should not make criminal, as it now does, 
all agreements in restraint of trade. A law should no more 
assume that a trade agreement is criminal than the law 
assumes any individual guilty before trial. 

Public policy, so far from indiscriminately making all 
such agreements guilty, should encourage any contract in 
restraint of trade which has for its object the maintenance 
of high standards in manufactured products, the abolition 
of deception in sales, the prevention of undue collections 
of perishable merchandise — like meats and fruits — at 
points where the demand cannot possibly equal the supply, 
so that a loss and waste are the results. It should discoun- 
tenance any contract which has for its purpose the extort- 
ing of an unreasonable price. 

As the law stands at present, it is subject to the follow- 
ing objections: — 

(1) As its principal section makes criminal, without 
further definition, an agreement in restraint of trade, it 
leaves to judicial determination the definition of the crime, 
and it has not yet been defined, but will only be defined as 
each case arises. The business community is therefore left 
in doubt as to what may constitute a crime under the law. 

(2) It makes no distinction between those agreements 
in restraint of trade which are beneficial to the public and 
those which are detrimental. An agreement among com- 
petitors, for instance, to sell only pure, as distinguished 



THE SHERMAN ANTI-TRUST LAW 35 

from adulterated, goods is presumably as criminal under 
its provisions as one designed solely to extort unreasonable 
prices. 

(3) Being indefinite in its definition of the crime and 
introducing into business an element of doubt and uncer- 
tainty as to trade agreements, it operates to the disadvan- 
tage of the scrupulous business man and in favor of the 
unscrupulous business man. 

(4) The fact that trade agreements beneficial to the pub- 
lic, as well as those which are injurious, may alike be crimi- 
nal under its provisions, discourages the formation of good 
trade agreements and encourages the formation of evil 
ones. The first, because scrupulous men desire to take no 
risks with the law; the second, because to unscrupulous 
men the risk of prosecution is less, since to include under 
any law good and bad acts as equally criminal inevitably 
discourages its enforcement. 

(5) The general prosecution of our leading business men 
for that which may not be inherently criminal or opposed 
to public policy, which this law makes possible, would tend 
to have one of two results — it might lead them either 
to sell out their business as a whole to men willing to take 
risks with the law, which would be a public injury, or it 
might lead them to subdivide their business and sell it out 
to smaller concerns, thus lessening the economies of pro- 
duction and distribution, which would be a step backward 
in our commercial evolution and a public injury. 

(6) The enforcement of this law, giving, necessarily, 
through its general terms, such wide latitude and discre- 
tion to executive officers in their right to proceed against 
corporations and individuals, is bound to create the appear- 
ance at least of favoritism in its application, and to result 
in lack of uniformity in the treatment of cases arising 
under it. 



36 ESSAYS AND SPEECHES 

Without any intention of reflecting upon the rightful 
purpose of the Department of Justice in recent actions 
under the law, a few statements regarding them may illus- 
trate this last point. In the Northern Securities case, a 
limited action was taken against the corporation only, and 
no attempt was made to hold the officers criminally. In 
the cases against the packers, the effort was made to hold 
them criminally liable. In this latter case, the Govern- 
ment found itself in the attitude of announcing through 
one department, after a thorough investigation, that the 
business was not a monopoly and that its profits were rea- 
sonable, and of seeking at the same time, through another 
department, to put its owners in jail as public malefactors. 
The Northern Securities case was so presented to the 
courts that the reinstatement of the Chicago, Burlington 
& Quincy Railroad, as a competitor of the Northern Paci- 
fic and Great Northern Railways, was not involved in the 
decree. The decision did not affect the $215,000,000 Chi- 
cago, Burlington & Quincy Railway joint four-per-cent 
bonds, guaranteed by the Northern Pacific and Great 
Northern Railways, and secured by the deposit of the bulk 
of the capital stock of the Chicago, Burlington & Quincy 
Railroad Company, which had been purchased by the 
other two roads. Thus it did not interfere with the device 
by which the operation was chiefly financed and the voting 
control of the competing Burlington road assured to the 
Northern Securities Company. As a consequence, when 
the Northern Securities Company was dissolved by the de- 
cision, the same interests remained in control of the rail- 
way situation in the Northwest, having that control repre- 
sented by two separate stock certificates instead of by the 
single Northern Securities stock certificates as formerly. 

We are not criticizing the Department for not attacking 
the interests of the thousands of innocent holders of the 



THE SHERMAN ANTI-TRUST LAW 37 

Chicago, Burlington & Quincy Railway joint four-per- 
cent bonds, and not attempting to compel them to submit 
to a change in their security. But from the beginning 
there was no hope that the Northern Securities case could 
have much practical effect, unless the final decision could 
scatter the stock control of the Chicago, Burlington & 
Quincy Railroad Company. This, it seems, could not equi- 
tably be done. The debenture bondholders had practically 
furnished the money to pay for the Chicago, Burlington & 
Quincy Railroad stock deposited as part security for their 
bonds, and under this plan had in effect also exchanged the 
voting power of the stock for the additional security af- 
forded by the joint guaranty by the other two roads of the 
principal and interest of their bonds. 

In this case the Department of Justice could not see its 
way clear to demand the full logical penalty either from 
the corporation or the individuals. If it had done so, it 
would probably have wrought more evil than good. As it 
was, it accomplished practically nothing. The "Saturday 
Evening Post," on July 15, 1905, in commenting editorially 
on the "End of the Northern Securities," said: "A year 
hence, in all human probability, no patron of the Northern 
Pacific or Great Northern will know, save as a matter of 
history, that the Government won its great anti-merger 
suit — any more than thousands of patrons of other com- 
binations are now able to tell that those combinations 
have been solemnly banned by the law. In any undertak- 
ing the most important beginning is to find out what can 
and what cannot be done." 

Certainly, some law, other than the Sherman Anti-Trust 
Law, is needed to deal with such situations as that pre- 
sented by the Northern Securities case. And such a law 
should certainly provide for the determination, first, as to 
whether or not, as a matter of fact, the consolidation worked, 



38 ESSAYS AND SPEECHES 

or would work, harm or benefit to the people of the section 
of the country affected. Then, if it was decided to be harm- 
ful, the remedy should be in the nature of an effort to re- 
store the former conditions of competition. If it was de- 
cided not to be injurious, then the Goyernment should, 
under the law, sanctiou it. Other instances could be given 
which with these cited indicate the impracticability of the 
Government's following any consistent course of procedure 
under such an indefinite law. How could uniformity of ac- 
tion be expected under a law which includes in its general 
condemnation that which is inherently innocent as well as 
that which is inherently guilty? 

As a matter of experience, we know in this country that 
no law is tolerable if enforced, or useful if unenforced, 
which designates good and bad acts as alike criminal. 

The Sherman Anti-Trust Law, in order to get at bad 
agreements in restraint of trade, makes all such agreements 
criminal. As some one has said: "It is like putting the 
whole community in the pest-house because some members 
of it have the smallpox." 

Ill-considered and ill-advised legislation is worse than no 
legislation at all. Every unenforced and unenforceable law 
undermines proper respect for law. 

In July, 1890, when the culminating years of a period 
of great prosperity had turned the mind of the public to 
questions relating rather to the distribution than the cre- 
ating of wealth, — a period of public disquietude like the 
present, — the Sherman Anti-Trust Law was passed in re- 
sponse to an excited public demand. Because of its inher- 
ent defects, this law became practically a dead letter until 
recently, when an effort has been made to use it in response 
to a recurrence of public protest against corporate abuses. 
It seems to us very unfortunate that now, when the public 
interest in such questions is fully aroused, we do not have 



THE SHERMAN ANTI-TRUST LAW 39 

greater efforts on the part of our leaders to create wise 
public sentiment in favor of proper legislation regulating 
general corporations; and that, so far as the trust question 
is concerned, the chief endeavor to satisfy the public mind 
is made through selected civil and criminal cases under the 
defective Sherman Law. 

The Sherman Anti-Trust Law should cease to be a fetish 
to so many public men. The assertion, that "not new laws, 
but present laws enforced, will cure our corporate abuses," 
should not pass unchallenged. In times of strong public 
feeling like the present, public men are prone to take up 
popular legislation, and generally, but not always, popular 
legislation is needed legislation. Men seek to be known as 
advocating rate legislation, for instance, because it is popu- 
lar. But where a reform must be secured by the correction 
of over-radicalism in an ineffective existing law, like the 
Sherman Anti-Trust Law, and the advocacy of the change 
will bring from the radicals of the country castigation in- 
stead of applause, public men act with caution and the status 
quo generally prevails. Let us hope that, before this period 
of general interest in corporation questions is passed, the 
question of the amendment of the Sherman Anti-Trust 
Law will be taken up by Congress, and the law made more 
practical and enforceable by the clearer definition of what 
shall constitute illegality in trade agreements, and by the 
exemption from its provisions of such agreements in re- 
straint of trade as are not injurious to the public. 

The remarks of Marshall M. Kirkman, in his recent vol- 
ume, "The Basis of Railway Rates," apply not only to the 
current discussion of that problem, but to corporations 
and corporation laws as well. He says : — 

"Exaggeration in discussions affecting corporations, 
whether on the part of managers or the public, is to be 
deplored in the interests of a right solution of the myriad 



40 ESSAYS AND SPEECHES 

questions of a public nature concerning them. Too much 
bitterness is shown in the controversy; too many things 
are being said having the air of private rancor, of personal 
feeling. Sharp phrases are being coined on both sides with- 
out much regard to the facts, all having a tendency to pre- 
vent calm consideration and an equitable adjustment of 
the matter. From whatever point of view the question is 
considered, it is never merely a question of silencing an 
opponent or influencing public opinion, but always of hav- 
ing the matter settled fairly, according to the rights of all 
concerned." 



THE DEFECTS OF THE SHERMAN ANTI- 
TRUST LAW AND A DEFENSE OF THE 
AMERICAN BUSINESS MAN 

{Delivered before the Trust Conference of the National Civic Federation at 
Chicago, October 23, 1907. Stenographically reported by G. Russel Leonard) 

Mr. Chairman, and Gentlemen of the Civic Federation: — 

When a nation becomes prosperous, it becomes critical. 
We have been very prosperous in this nation, and it seems 
we are about ending a period of greatest prosperity. We 
may have a prosperous future before us, but the climax of 
prosperity has perhaps been reached, and I hope a climax 
of criticism in this country. Personally, I have very little 
use for the critic. We are living, and have lived for the last 
two or three years, in an atmosphere of criticism, much of 
it very useful; much of it, though destructive, very useful. 
But the kind of criticism we want, and of which we have 
not had enough as yet, is the criticism that is designed to 
tear down for the purpose of building up afterwards, and 
the kind of a critic who is valuable to his community and to 
his State is the man who criticizes not simply for the pur- 
pose of destroying an institution or of destroying a man, 
except in so far as that destruction is necessary to the ac- 
complishment of a reform. Then he, too, must bear the 
lash of criticism, for it is the doers and not the drones who 
attract people's attention and who must take the lashing 
of these gentlemen who like to tell us so well how things 
should be done in this country. 

This is an age of criticism. We had another such period 
about seventeen years ago, and at the end of that period of 
the greatest prosperity which the country had then known 



42 ESSAYS AND SPEECHES 

for many years, in a period of protest against undoubted 
corporate abuses such as that through which we are pass- 
ing, at a time when there was widespread protest against 
certain corporation practices, as there is at present, at a 
time when hostile legislation was being enacted in the dif- 
ferent State legislatures, as there is at present, there was 
passed this hostile, illy conceived, superficial legislation 
which is called the Sherman Anti-Trust Law. Passed with- 
out due consideration, passed in a period of public excite- 
ment; radical legislation, it has until recently remained a 
dead letter upon the statute books of the United States, 
and not until recently has any attempt been made to use it 
as a corrective agent of reform in the United States. 

The Sherman Anti-Trust Law provides, without fur- 
ther definition, that all agreements in restraint of trade 
are criminal. It does not define the crime. It includes in its 
provisions all kinds of trade agreements in restraint of 
trade, whether publicly beneficial or publicly detrimental. 

Now, this is the day of the trade agreement. We have 
agreements in restraint of trade which are unquestionably 
of public benefit. An agreement among manufacturers, 
for instance, to compete upon pure goods only as distin- 
guished from adulterated goods, is unquestionably to the 
public benefit, and yet under the provisions of the Sher- 
man Anti-Trust Law it is as criminal as any agreement 
for the purpose of charging extortionate prices. An agree- 
ment among manufacturers to prevent the undue accumu- 
lation of fruits or meats or other perishable commodities 
at places where the demand caunot possibly equal the 
supply and where the accumulation of such commodities 
would result in a loss of wealth, which is injurious both to 
the producer and to the community, — such an agreement 
in restraint of trade is to the public benefit. An agreement 
not to sell below cost even may be a public benefit as pre- 



ANTI-TRUST LAW AND BUSINESS MAN 43 

serving a larger area of reasonable competition, for cer- 
tainly we have heard a great deal recently about these great 
corporations which seek to secure a monopolistic control 
of a commodity in a certain district for the sake of raising 
prices later after crushing out local competition. We have 
heard the greatest complaint about that form of competi- 
tion. So that I say an agreement in restraint of trade for 
the purpose of preventing selling below cost may be a 
public benefit. Of course it may not be a public benefit. It 
may be for the purpose of extorting an unreasonable price, 
and if such an agreement is for the purpose of extorting an 
unreasonable price, it should be put under the ban of the 
law, as it is under the ban of the Sherman Anti-Trust Law 
at present. 

But the point I wish to make is that there are good agree- 
ments in the restraint of trade, agreements in restraint of 
trade publicly beneficial, as well as those which are pub- 
licly detrimental, and that the Sherman Anti-Trust Law, 
including as it does good agreements with bad agreements, 
is a law which is operating to-day against the proper con- 
duct of business and of commerce in the United States. 
[Applause.] 

In the first place, it is operating against the proper 
conduct of business because the crime is not defined. The 
business community to-day is in doubt as to what is crimi- 
nal under the Sherman Anti-Trust Law, and the crime has 
not yet been defined, but it is defined only as each case 
arises under the Sherman Anti-Trust Law through court 
decisions. The result is that the business community is in 
doubt as to what constitutes a crime under the Sherman 
Anti-Trust Law. 

Now what is the effect of that on the business commu- 
nity? It militates against the scrupulous man in business, 
and in favor of the unscrupulous man in business, for the 



44 ESSAYS AND SPEECHES 

reason that the scrupulous man desires to take no risks 
with the law and refrains from action, and the unscrupu- 
lous man violates the law with greater impunity; for expe- 
rience shows that in this country and in any country any 
law which includes actions inherently innocent with those 
inherently guilty under its ban is inevitably difficult of 
enforcement. So the unscrupulous man violates the law 
with greater impunity and the scrupulous man refrains 
from action. And as a consequence the Sherman Anti- 
Trust Law to-day is encouraging the crushing-out of 
competition, is encouraging the formation of larger cor- 
porations all the time, because they can do legally by con- 
solidation what they cannot do legally under the Sherman 
Anti-Trust Law as separate corporations through a trade 
agreement. [Applause.] 

Another objection to the Sherman Anti-Trust Law — 
and it is a very serious objection — is that under a law so 
indefinite in its description of crime, of necessity such lati- 
tude and discretion is given to the executive officers of the 
Department of Justice in their right to proceed against 
corporations and against individuals that inevitably the 
appearance, at least, of favoritism is had in the institution 
and in the bringing of those cases. Public sentiment will 
not sustain the criminal prosecution of those men whose 
business seems to be conducted for the public benefit and 
whose prosecution seems to be against the public benefit, 
there being no inherent guilt in their methods. As a result 
of this latitude, which is given of necessity, as I say, to the 
executive officers of the Government, — their right to 
proceed against corporations and against individuals, — 
there has been — and I do not wish in saying this to cast 
reflection upon the rightfulness of intention of the Depart- 
ment of Justice — but there has been the appearance of 
favoritism in the prosecutions instituted in that depart- 



ANTI-TRUST LAW AND BUSINESS MAN 45 

ment. In the case against the Northern Securities Com- 
pany suit was brought against the corporation alone. In 
the case against the packers the suit was brought, not 
only against the corporation, but against the individuals, 
and the Government found itself in that latter case in the 
position of announcing through one department that the 
business was not a monopoly and was conducted at a rea- 
sonable profit, and through another department at the same 
time of seeking to put the owners of that business into jail 
as public malefactors. Other instances could be cited. 

Another thing, — the fact that attack upon men of pres- 
tige and men of supposedly high character and men of 
position is made possible under this law, and that attacks 
upon the men who do things attract attention in this coun- 
try, has resulted so far apparently in an inability on the 
part of the Department of Justice to refrain from trying 
their case in the newspapers prior to the institution of the 
case. [Applause.] 

Now, let us take up this Northern Securities case and let 
me explain just what that case is, in order that we may 
see the futility of a penal law such as the Sherman Anti- 
Trust Law when an attempt is made to use it as a correc- 
tive of assumed business ills. Now, follow this: The Great 
Northern Railroad and the Northern Pacific Railroad 
jointly bought the stock of the Chicago, Burlington & 
Quincy Railroad Company, with one hundred million dol- 
lars of capital stock, and this hundred million dollars of 
capital stock of the Chicago, Burlington & Quincy Rail- 
road Company was divided equally between the Great 
Northern Railroad and the Northern Pacific Railroad. 
Then the Chicago, Burlington & Quincy Railway Com- 
pany issued $215,000,000, joint four per cent bonds, guar- 
anteed by the other two roads, behind which bond issue 
was placed as collateral security the stock of the Chicago, 



46 ESSAYS AND SPEECHES 

Burlington & Quincy Railroad Company. The voting 
power of the stock, therefore, of the Chicago, Burlington 
& Quincy Railroad Company, the road which made the 
rates, the road which it was desired to wipe out as a com- 
petitor of the two other roads, passed to the Great North- 
ern Railroad Company, and to the Northern Pacific Rail- 
road Company, since they owned the stock, half and half, 
of the Chicago, Burlington & Quincy Railway Company. 
And then the Northern Securities Company was formed, 
and these stock certificates of the Great Northern and the 
Northern Pacific Railroads were put into the hat called the 
Northern Securities Company and the Northern Securities 
stock issued in their place. 

Now, the Department of Justice in bringing that case 
made no attempt to have adjudicated the status of the 
$215,000,000 of joint four's of the Chicago, Burlington & 
Quincy Railway Company bonds which had been guaran- 
teed by the Great Northern and the Northern Pacific Rail- 
roads. Certainly, if any step in that transaction was against 
public policy, the step by which that independent rail- 
road — the Chicago, Burlington & Quincy Railroad — was 
wiped out of competitive existence was illegal — certainly, 
if any step should have been attacked in the Northern 
Securities case that step which was the financial stepladder 
over which the whole transaction was lifted, should have 
been attacked; but it was not attacked, and the court in 
the Northern Securities case, since the Department of Jus- 
tice had not attacked that bond issue and the segregation 
behind it of the Chicago, Burlington & Quincy Railroad 
stock, simply held that the Northern Pacific stock and the 
Great Northern stock which was held by the Northern 
Securities Company should be traded for the stock of the 
Northern Securities Company, so that every man who had 
a certificate of stock in the Northern Securities Company 



ANTI-TRUST LAW AND BUSINESS MAN 47 

received two certificates of stock in lieu of it, one in the 
Great Northern Company and the other in the Northern 
Pacific Company. That involved no change of ownership. 
The voting power which controlled this great Northwestern 
system remained in the same men. The Northern Securi- 
ties Company had done its work. Conditions had been 
changed permanently, and no attempt was made in this 
legal effort to bring about the former conditions. Mani- 
festly the Anti-Trust Law proved a failure so far as any 
improvement or practical change in the condition of the 
Northwestern railway situation is concerned. The proper 
remedy should have been sought in an effort to restore the 
old conditions of competition, not in changing in the hands 
of the same owners a piece of white paper for a piece of 
red paper and a piece of blue paper, the certificates of 
stock in the Great Northern and the Northern Pacific Rail- 
roads for one of the Northern Securities Company. And 
why did they not do it? Because they reasoned that to 
attack the security of the innocent holders of those bonds 
would result in more harm than it would good, and they 
were probably right. What hope was there at any time of 
securing any practical change in the railway situation in 
the Northwest through the Northern Securities case when 
they left undisturbed the segregation of that stock be- 
hind those bonds which wiped the Chicago, Burlington & 
Quincy Railroad out of existence as a competitor of the 
other two roads? And yet how many reputations have been 
built up on the Northern Securities decision ! The proper 
law would provide that in such a case as the Northern 
Securities case it should be first determined whether or not 
that consolidation was for the public interest or against 
the public interest. If it should be held by some tribunal 
established by our Government that this agreement in re- 
straint of trade was beneficial to the Northwest, then that 



48 ESSAYS AND SPEECHES 

agreement should be sanctioned and upheld; and if it was 
found to be publicly detrimental, then that agreement 
should be set aside, and the law should provide the method 
for the restoration of former conditions. But it must have 
been known, at the time that the Northern Securities case 
was brought up, that it could result in nothing practical, 
when no attempt was made to bring into court that which 
was the very business corner-stone of the whole transac- 
tion. Give us honesty of purpose; give us those men in 
charge of such prosecutions as these who will take action 
when they believe it will result in practical good for this 
people and to this nation. Every attempt to seek the en- 
forcement of such a law as this which does not succeed 
tends to undermine respect for all laws. The Sherman 
Anti-Trust Law has been a dead letter for nearly seven- 
teen years; and it has failed thus far to be a practical bene- 
fit, though attempts have been made to use it recently for 
the correction of existing business evils. 

We need the amendment of this law. We need, first, 
a clear definition of what is criminal under the Sherman 
Anti-Trust Law, so that any one who is contemplating an 
agreement in restraint of trade, which may be beneficial 
or which may not be publicly detrimental, shall know 
what he can do without running the risk of indictment 
under the criminal laws of the United States and imprison- 
ment after conviction. One of the prominent lawyers of 
the city of Chicago told me that he had at one time not 
long ago four agreements in restraint of trade brought to 
him by clients, two of which were publicly beneficial, and 
two of which were not publicly detrimental, and he was 
unable to advise his clients that they could enter into one 
of them without running the risk of indictment. 

I am going to say here something to-night about the 
men who do things in the United States. [Applause.] I 



ANTI-TRUST LAW AND BUSINESS MAN 49 

am tired of the interminable criticism of men who are 
doing things in the United States. [Applause.] Take 
James J. Hill, who was responsible largely for the North- 
ern Securities Company, starting out as a poor boy on the 
Upper Mississippi, checking freight on a steamboat land- 
ing and sharing his room with Philip D. Armour in order 
to save expense — starting from small beginnings, but a 
great man and a man who had imagination — which is 
as essential in great undertakings as the commercial in- 
stinct itself — looking out to the great Northwest — start- 
ing with his small road and extending it and sharing his 
profits honestly pro rata with his stockholders, until, in 
1904, he had built a road which carried eleven million 
tons of freight and over three millions of passengers. He 
was building up other fortunes while he was making that 
great fortune of his own. He was creating thousands of 
pay-rolls while he was making that great fortune. He 
was creating the opportunity for making a livelihood for 
thousands of men. He was creating the material for thou- 
sands of industries. Where was it, in the course of that 
career from a poor boy checking freight on that steam- 
boat landing until to-day when he stands at the head of 
that great road, — tell me where it was that James J. Hill 
first became a menace to the people of the United States 
and to the prosperity of this country, and a man properly 
to be indicted under its criminal laws. And yet James J. 
Hill is practically an adjudicated criminal under the North- 
ern Securities case. And if the statute of limitations has 
not run he is liable to indictment and after trial and con- 
viction to imprisonment to-day. 

This talk by the muck-raking magazines of to-day is 
one-sided. Who are the men to-night who are doing the 
most for their country at this time? In the city of New 
York to-night some of those very men who for the last 



50 ESSAYS AND SPEECHES 

four years have borne the lash are doing a work for their 
country the value of which it is hard to estimate, however 
extravagant might be our language. As you and I will 
sleep in peace and in quiet to-night, devoted men in that 
great financial heart of our nation will be awake in the 
early morning hours seeking to hold values, seeking to pre- 
vent the destruction of confidence, upon which the whole 
prosperity of this nation depends. [Applause.] Are they 
seeking to depress values to-day as our friends the critics 
would have us believe, in order that they may reap the 
benefit? No; they are seeking to uphold the credit and 
reputation upon which prosperity exists. They are seeking 
to save employment for thousands of your men, Mr. Gom- 
pers, by sustaining credit and sustaining confidence. They 
are seeking to save the opportunity for the profitable con- 
tinuance of you who are merchandising, of you who are in 
manufacturing, of you who are in any of the various walks 
of business life. And I would rather have half a dozen of 
those men than all the muck-raking magazine critics that 
ever walked the face of the earth [applause] — those men 
who point out a crack in the sidewalk and claim that the 
whole town is going to fall through it. [Applause.] The 
American business man is honest — the average American 
business man. He wants the Sherman Anti-Trust Law cor- 
rected because he believes in obeying his country's laws, 
and I repel the assumption of so many in these days that 
the American business man is a man who must be watched 
— watched — watched. The American business man 
stands for that which is right in this country to-day. He 
asks that this law be amended so that he can pursue his 
business — that business which is proper and correct — 
without the fear of molestation or criminal prosecution 
when he is not a criminal. [Applause.] 

Very many of these agreements in restraint of trade are 



ANTI-TRUST LAW AND BUSINESS MAN 51 

for the purpose of existing, not of extorting. But for some 
not very singular reason we do not seem to have at this 
time that particular kind of courage in statesmanship 
which leads a man to stand against that which is wrong 
when it is unpopular to stand against it. It requires no 
great courage for a public man who exists through his popu- 
larity to fight the Standard Oil Company or some of these 
great trusts. That which is true courage in statesmanship 
is the standing up for that which is right, but that which 
is unpopular, and which will bring down upon the man 
who so stands the castigation instead of the applause of 
the radical portion of our people. [Applause.] We need 
more of such leadership to stand for that which is right, 
and in this country of ours the man who nails himself to a 
right principle in the long run will be vindicated. But while 
we have those who are standing for radical railway legisla- 
tion, — and I do not say that it is not needed, — while we 
have those who do not hesitate to seize leadership in those 
reforms which are pleasing to the radical portion of our 
people, we do not seem to have that leadership which will 
stand for the reform of a radical, ineffective, existing law 
like the Sherman Anti-Trust Law when such action on 
their part will bring down the castigation of the public 
instead of its applause. What the business man wants to do 
is what you are endeavoring to do — you who represent 
the laboring man of the United States [addressing Mr. 
Gompers] when you are seeking to prevent that kind of 
competition which crushes out life — when you are seek- 
ing to bring about cooperation and better understanding 
between those who employ and those who are employed. 
You have singularly good fortune in not being opposed by 
the politician. [Laughter and applause.] The business 
man, in attempting to secure fair and honest cooperation, 
may not meet with the opposition of politicians, but he 



52 ESSAYS AND SPEECHES 

meets with very indifferent support. If we are going to 
make any progress in this vexed question, the Sherman 
Anti-Trust Law must be amended so as to clearly define 
what the crime is. Provision must be made by which agree- 
ments in restraint of trade can be submitted to some tribu- 
nal acting in the interest of the public and representing 
them, before which such agreements can be tried in their 
relation to the public interest. Then such agreements, 
whether in restraint of trade or not, if not publicly detri- 
mental, or if publicly beneficial, must be permitted, and 
if for the purpose of extorting an unreasonable price or 
otherwise publicly detrimental, they should be put under 
the ban of the law, and if consummated, the offenders 
should be punished. [Applause.] 



BUSINESS AND THE SUPREME COURT 
DECISION 

(Saturday Evening Post, June 24, 1911) 

The Supreme Court of the United States has held that 
contracts which unnecessarily and unduly restrict compe- 
tition or unreasonably restrain interstate trade are pro- 
hibited by the Sherman Law. The question that imme- 
diately confronts the business man is — What constitutes 
a reasonable contract in restraint of trade that would not 
come under this prohibition? He cannot be certain of the 
reasonableness of a contract without a judicial determina- 
tion of the question in each particular case. The business 
world, therefore, must still be in doubt with this advantage 
only as compared with the past: that whereas, heretofore, 
under the strict reading of the statute, a business man was 
certainly a criminal if he made a contract in restraint of 
trade, he is now one only if the courts should say his con- 
tract was unreasonable after it was made. 

What the business man wants to know is what kinds of 
contracts in restraint of trade are reasonable and what 
kinds are unreasonable before he makes them, and in this 
the decision does not materially help him. If dealers in 
meat, fruit, butter, and other perishable commodities 
agree that they will not ship ten carloads a week to a com- 
munity that can consume only five carloads, since by so 
doing they save the five extra carloads from being spoiled, 
which would have resulted in a loss to them, — and in the 
long run to the community, which always pays the even- 
tual cost of such waste, — they might expect such a con- 
tract in restraint of trade to be held as reasonable. Yet 



54 ESSAYS AND SPEECHES 

might it not be attacked on the ground that, had the extra 
five cars not been diverted, the immediate effect of selling 
an oversupply competitively would have meant lower 
prices to the community for the time being, and that the 
agreement, therefore, was one to extort higher prices? 

It is easy to understand that the making of such con- 
tracts still involves risk to the business community, for 
the courts might ascribe either a good or a bad intention 
to such contracts according to the standpoint from which 
the court viewed their results. A prudent and scrupulous 
business man is still in a quandary, for he wishes to take 
no risks of violating the law. In regard to offenses other 
than those against the Sherman Law our statutes govern- 
ing business are reasonably specific. The truth is, we are 
in a transition state in business, and the managers of great 
industrial corporations are of necessity in a dangerous 
situation. 

Take the case of the United States Steel Corporation, 
which is said to advocate the policy of stable prices and 
undoubtedly at times in the past has sold steel at a lower 
price than was justified by the demand and the general 
condition of business. It has, until very recently, main- 
tained its prices, I understand, in a time of slack demand; 
and, in consequence, unquestionably lost considerable 
business to competitors. Suppose it should change its 
policy and, though still selling steel at a profit, reduce 
its price to the community to a point where many of its 
smaller competitors would have to close shop. Would it 
then be a bad trust? Suppose it maintains its prices until 
it commences to lose so much business that self-preserva- 
tion compels it to go into the market and take the business 
at a price that, owing to the lesser cost of large production, 
enables it to outsell its competitors and drive them to the 
wall, will not such an action immediately place it, as a 



THE SUPREME COURT DECISION 55 

corporation, and its managers personally, in jeopardy, by 
raising the question as to whether its past absorption of 
plants was not for the purpose of crushing competition 
and establishing eventual monopoly? The truth is that 
the Supreme Court decision still leaves the country with its 
greatest question still unsolved; and my own idea is that 
the plan of making the Sherman Anti-Trust Law effective 
as an agent of commercial and industrial reform is a mis- 
taken one. 

The test of reasonableness leaves a wide discretion with 
the Executive Department of the Government in the insti- 
tuting of suits. The operations of certain large corpora- 
tions may be assumed to be within reasonable limits and 
the companies relieved of defending themselves against 
attack; whereas other corporations, assumed by the Ad- 
ministration to be acting unreasonably in restraint of trade, 
may be subjected to repeated suits. This would seem 
to imply an injustice as long as the distinction between 
reasonable and unreasonable restraint is so uncertain; 
and the situation continues to be a dangerous one, espe- 
cially on account of the criminal penalties of the statute. 
The fixing of crime should be a matter of administrative 
duty, and not of discretion. The solution of the ques- 
tion, if we depend on this law, must require an indefinite 
amount of litigation and an indefinite time. 

Does not our hope for a satisfactory solution of the 
problem lie in the direction of the establishment by law 
of business tribunals, before which business men, desiring 
to make contracts in restraint of trade, can come and pub- 
licly submit proposed contracts? Such contracts could 
then be considered in relation to the public welfare and, if 
adjudged reasonable, be authorized, or, if considered un- 
reasonable, be rejected. 

With such tribunals, empowered to cancel such con- 



5Q ESSAYS AND SPEECHES 

tracts upon complaint if after trial they proved harmful to 
the public contrary to the first opinion of the tribunal, 
surely we should be better protected as a people and as 
business men than we are to-day, when, under the decision 
of our highest court, contracts in restraint of trade may 
be made at the risk of both the maker and the community. 
For to-day, if the contract be unreasonable, the commu- 
nity suffers until this contract is judicially checked, and 
the maker is left in doubt as to whether or not he is a 
lawbreaker until such adjudication. 



THE TRUST PROBLEM 

(Chicago Tribune and New York Times, November 7, 1911) 

The trouble with the efforts the Government is making 
to cope with the trust problem arises from the fact that 
the underlying assumption of the Sherman Anti-Trust 
Law, under which its actions are brought, is that the pol- 
icy of unrestricted competition still subserves the best in- 
terests of the public. 

The steps the Government has taken have not had the 
effect of increasing competition, but in most cases of estab- 
lishing precedents which will interfere with proper methods 
of business now almost universally followed. It is assumed 
by many that the present policy of the Department of 
Justice of attack under the Sherman Anti-Trust Law upon 
present methods of doing business is a general one. 

Whatever may be the inference to be drawn from the 
remarks of the Attorney-General as to his future proce- 
dure, the fact remains that he has barely passed the edge of 
the field of his possible activity. The alarming feature of 
the situation is that, with nothing practically demon- 
strated in the way of relief to the public through his past 
actions in a comparatively small number of possible cases, 
the indirect destruction of values and the depressing effect 
upon business which has resulted point to a great future 
injury to business when the Department of Justice fairly 
enters its crusade. 

And if there be potency for evil in the policy of the 
General Government proceeding against corporations do- 
ing an interstate business, we may properly be apprehen- 
sive when the attorneys-general of the different States and 



58 ESSAYS AND SPEECHES 

the prosecuting attorneys of the different counties of the 
States, following the example of the Government and act- 
ing under the existing local and unenforced anti-trust laws, 
attack local industries operating under trade agreements. 

Let no one underestimate the number of trade agree- 
ments in existence in the United States. The United 
States consular reports state that in 1905 there were 385 
cartels or agreements in restraint of trade in existence in 
Germany, where they are encouraged in behalf of the gen- 
eral public and have no political opposition. 

I believe it no exaggeration to state that in the United 
States we have five cartels to every one in Germany. 
When the agreements among local retailers, district whole- 
salers, local and district manufacturers, publishers, labor 
unions, contractors, employers, and employees are consid- 
ered, existing as they do throughout almost the entire 
country, some reasonable in their nature and some unrea- 
sonable, an idea may be gained of how far the business 
interests of this country have already adopted the new 
order of cooperation as against the old one of unrestricted 
competition. 

So settled a thing in the business of the country is this 
new order that the business man is only beginning to real- 
ize that the system has received a peremptory challenge. 
He is coming to understand that this attack of the Depart- 
ment of Justice is not simply an attack upon the rich or 
upon great corporations; it is an attack upon industry and 
the system under which it now operates. 

The two most discussed methods of dealing with the 
trust question are the method proposed by the radicals and 
the Taft method. The radical recommendation seems to 
be to amend the Sherman Anti-Trust Law so that the 
flexibility imparted to it by the recent decision of the 
United States Supreme Court is destroyed and all agree- 



THE TRUST PROBLEM 59 

ments in restraint of trade, reasonable or unreasonable, are 
made illegal. 

That such a plan is even suggested indicates the confi- 
dence felt by radical politicians in the success of a political 
crusade against corporations which must draw its strength 
from the passions and prejudices rather than from the rea- 
son of our people. 

It hardly seems worth while to discuss at length this 
proposal. Our people are too intelligent to wish to hark 
back to the old methods of unrestricted competition. 
These have gone forever like antiquated methods of trans- 
portation and manufacture. 

The Taft method seems to be the invoking of the Sher- 
man Anti-Trust Law to dissolve consolidated corporations 
into their former constituent corporations, under the the- 
ory that such separation will tend to restore the former 
condition of competition between them. The result of the 
Government's suits thus far brought, in this attempt to fly 
in the face of the irresistible law of commercial evolution, 
seems to have been a change in the form of ownership and 
control and not in the fact of ownership or the substance 
of control. 

Consider the Northern Securities suit, where substan- 
tially the same set of owners find themselves in control of 
the same railroads through their possession of stock certi- 
ficates in the Great Northern and Northern Pacific Rail- 
roads, instead of one certificate of stock in the Northern 
Securities Company. 

Does any one of business sagacity expect that through 
division of the evidence of ownership the undisturbed 
ownership itself will cease to exercise its rights and func- 
tions? 

We may as well expect the tides to turn backward as to 
expect the scattered constituents of the old Standard Oil 



60 ESSAYS AND SPEECHES 

Company, owned and controlled by the same interests, to 
fight each other. 

The policy of the Administration in these suits against 
consolidated corporations will result only in compelling 
the scattered constituents, still allied in common inter- 
ests and ownership, to do their business at a somewhat 
greater cost, which the public will chiefly pay. 

We are all affected by the attitude which the Govern- 
ment is now taking upon this question. No man who labors 
with his hand can stand by in safety and expect to see the 
rich suffer and himself escape. He may feel that he does 
not receive his full share of the product of the enterprise of 
which he is a part, but he will not be helped by having the 
enterprise crippled. 

It is easier to destroy than to upbuild. An iron bolt 
thrown by an ignorant or a ruthless hand into a great en- 
gine running at full speed may destroy it. One man may 
destroy a building upon whose energies thousands have 
toiled. The agents of Government, now so active in throw- 
ing missiles into the great machine of national industry, 
will assuredly make their impression. 

But it is of little use to rail against methods of securing 
progress. The Administration, if doing nothing more, is at 
least demonstrating the inefficiency and inutility of the 
Sherman Anti-Trust Law. What we as business men should 
turn our minds to at present is the proper step to be 
taken in legislation which will be forward and not back- 
ward. 

The recent attacks upon business have frightened many 
into the advocacy of ill-considered measures. Federal li- 
cense of corporations in the present state of our laws will 
increase our dangers, for it will only invite additional 
attacks upon the proper and legitimate business of cor- 
porations. 



THE TRUST PROBLEM 61 

The fact that the Second Bank of the United States was 
chartered by the Government was only an invitation to 
the Jackson Administration to destroy it, and when it was 
destroyed, among its chief enemies were the Government 
directors of the bank, who had acted as spies. 

Federal license may be an incident to the proper solution 
of the problem, but in itself it is no more a solution of the 
fundamental principles at stake than is the Sherman Anti- 
Trust Law. We should, however, have a new law upon 
our statute books during this transition period, when we 
are solving the true relationship of the old theory of com- 
petition with the new condition of cooperation — while 
we are seeking to find the proper legislative expression of 
the compromise between cut-throat competition and un- 
restricted monopoly which American business is already 
recognizing in practice. 

While we are seeking a proper solution, the law which I 
propose will allow us to do it with the minimum of busi- 
ness disaster, and it will aid us in finding a way to the final 
solution by making us, as a people, more acquainted with 
the nature and purposes of agreements in restraint of trade. 

I suggest a law the general terms of which will provide 
for a tribunal of selected business men of high standing, 
before which corporations or individuals desiring to form 
agreements in restraint of trade may voluntarily appear 
and have such proposed agreement considered in its rela- 
tion to the public interest. 

If such agreement shall be considered by the tribunal 
either beneficial or not injurious to the public, then its 
execution shall be authorized, and those forming it shall 
be in the mean time immune from prosecution under the 
Sherman Anti-Trust Law. 

The tribunal, however, shall have the power, upon its 
own initiative, to recall the authority granted to carry 



m ESSAYS AND SPEECHES 

out such agreement, if it should prove, after trial, to be 
injurious to the public in the judgment of the tribunal. If 
such proposed agreement in the first instance be regarded 
by the tribunal as injurious to the public, it shall refuse to 
sanction it, and if it is then entered into, the makers shall 
be liable to prosecution under the Sherman Anti-Trust 
Law. 

There should be the right of appeal from the decision of 
the tribunal to the courts in regard to the reasonableness 
of a contract in restraint of trade — by the proper public 
officials in the case of the authorization of such a contract, 
and on the part of the parties applying in case of a refusal 
to sanction such a contract. 

Pending a decision, on appeal to the courts by a public 
prosecutor where an agreement has been authorized and 
has not been recalled by the tribunal, the agreement shall 
be operative and the contracting parties free from prosecu- 
tion. If the courts shall decide upon such an appeal against 
the agreement, it shall be canceled, and further operations 
under it shall be subject to the penalties of the Sherman 
Anti-Trust Law. 

Such a law will have the following advantages : — 

First, it does not interfere with any existing rights of 
the Department of Justice to have adjudicated, under the 
Sherman Anti-Trust Act, the reasonableness of interstate 
corporations. 

Second, under the present holding of the Supreme Court, 
agreements in restraint of trade are now made both at the 
risk of the public and of the business men making them — 
at the risk of the public, because in the case of an unrea- 
sonable contract it remains in force and the public suffers 
until after long adjudication the court declares it unrea- 
sonable; at the risk of the men making it, for they cannot 
know in advance whether the court will hold such agree- 



THE TRUST PROBLEM 63 

ment reasonable or unreasonable, and whether in conse- 
quence they will be held as criminals or not when the ad- 
judication is completed. 

Third, this law would invite men having trade agree- 
ments already in effect, which they regard as reasonable, 
to make them public and to request review of them by the 
tribunal in order to relieve themselves of the possibility of 
actions against them personally under the penal code. 

Fourth, this publicity will educate the public in the dis- 
tinction to be made between reasonable and unreasonable 
agreements in restraint of trade and aid in revealing the 
true nature and vast importance of the problem which 
must be solved. 

Fifth, it will gradually segregate the men and corpora- 
tions engaging in fair trade agreements who are willing to 
subject them to the preliminary test of a public considera- 
tion by the tribunal from those unwilling to do this. 

Sixth, it does not involve coercion, for submission to the 
tribunal is voluntary. 

Seventh, under this law the proper conduct of business, 
which is the important thing, rather than the form of its 
organization, will be emphasized. 

To sum up, under the proposed law the question of the 
public interest, which is of prime importance, will be de- 
cided by an impartial public tribunal at the time the con- 
tract is sought to be framed. If it is held to be unreason- 
able it cannot go into effect and the public will not suffer 
in the mean time. 

At the same time the men desiring to make it have the 
same opportunity of relief from the courts later that they 
have now. If, however, it is held by the tribunal to be rea- 
sonable, the business man can engage in it without fear of 
prosecution until the court has decided against him, when 
he must desist, under penalty. 



64 ESSAYS AND SPEECHES 

The Department of Justice is now bombarded with re- 
quests for their opinion on such questions, because good 
business men desire to take no risk with the law, and rather 
than to run the risk of prosecution for something they do 
not regard as criminal are seeking to have the Department 
of Justice, an association of lawyers, assume the powers of 
review upon business methods which this tribunal would 
assume. This situation, in itself, constitutes an argument 
for this proposed law. 



ADDRESS AT H. M. BYLLESBY BANQUET 

(At the Chicago Club, in Chicago, June 29, 1911. Stenographically 
reported) 

Mr. Byllesby, and Gentlemen: — 

I do not know how acceptable or pleasant my remarks 
may be to the majority of those present, but I have come to 
learn in the past few years that they are always acceptable 
to my dear friend Byllesby. He invites me to speak every 
time an occasion seems to him to warrant it, and unfortu- 
nately for me that happens quite frequently. He always 
tells me to "Say so and so," and accordingly I have spent 
an hour reading one of his addresses along which he tells 
me he hopes I will model my remarks. [Laughter and ap- 
plause.] He has intimated that it will not be amiss if I 
throw a few flowers at the capitalists. He tells me that he 
wishes me to dwell especially on the fact that there is at 
the present time in this country a very widespread feeling, 
that perhaps only a few of us are aware of, that we are 
getting rich too quick, and that it is very important to the 
general welfare of the country, to say nothing of ourselves, 
that that idea should be dissipated. [Laughter and ap- 
plause.] And, gentlemen, I confess in rising to address 
an assembly of men like this who are constructive, men 
who are dealing with problems of upbuilding, that I feel 
for once a great temptation to become a critic and to do as 
Uncle Joe Cannon says the Chautauqua lecturers do when 
they come into his district: "Damn everything over a foot 
high or a year old." [Laughter.] 

It is obvious, gentlemen, that a good many of us who 
are business men, and are not especially orators, have at 
this time occasion to especially notice the trend of affairs 



66 ESSAYS AND SPEECHES 

in the United States. We are becoming critics and we have 
a right to become critics of the prevailing methods of criti- 
cism. This has been a period of great prosperity in this 
country, and as always happens in times of great pros- 
perity, the attention of the people has become largely di- 
verted from the consideration of those problems which 
relate to the production of wealth and directed to those 
questions which relate to its distribution, and then critics 
thrive. A fine way to engage the public attention for any 
party, for any young man or for an idle man, — for the 
real critic is often an idle man, — is to assault somebody 
who is doing something, for it is the doers and not the 
drones in whom people are interested. [Applause.] 

I have read in the magazines articles as to the tremen- 
dous power of certain men through great wealth. Banked 
by an impressive background in black type of figures rep- 
resenting the aggregated resources of a group of banks, 
railroads, etc., owned by hundreds of thousands of peo- 
ple, will be printed the name of J. P. Morgan, as if his in- 
fluence was a menace to the liberties of the people of the 
United States. This is a favorite way, not only with the 
name of Morgan but with many other names, of creating 
the impression of the existence of a sinister power. These 
men have great powers, but how do they gain that influ- 
ence over the property belonging to thousands of other 
people who willingly entrust it to their guidance? As a 
rule they exercise leadership and power because their exer- 
cise of it is wise, temperate, and just. Inert wealth has no 
power. Wealth in motion is power. And many of the 
greatest leaders in finance of to-day are not men of vast 
wealth, but those who through their qualities of care, ini- 
tiative, and justice keep large bodies of wealth in useful 
motion. The limit of the power which comes solely 
through the ownership of wealth is a control simply over 



ADDRESS AT H. M. BYLLESBY BANQUET 67 

the thing owned. Power which comes through leadership 
gained by the qualities which I have mentioned is com- 
paratively unlimited in its extent and it should be. Why 
does James B. Forgan have such power as chairman of the 
Clearing-House Committee of the city of Chicago? It is 
not because of personal wealth, it is not because of control 
of the voting strength of this voluntary organization, it 
is not because he has the largest bank, but it is because he 
has shown through the many years he has lived in Chi- 
cago qualities which have inspired the confidence of busi- 
ness associates, and he has great power only because he 
exercises it with temperance, wisdom, and justice. 

The effort of the magazines and the muck-rakers to 
create the impression that there is something wrong in this 
kind of leadership, which when properly considered is the 
triumph of individuality over wealth, is that to which I 
am objecting. Many of the great leaders in finance have 
become wealthy, but their greatness has come because of 
their leadership among men and their consequent power 
over wealth, and not because of the power which their 
personal wealth gives them. 

Two of my friends had a conversation once which illus- 
trates this point. They had become members of the boards 
of directors in several railroads. One of them said to the 
other, " It seems to me that we should become the owners 
of more stock in the railroads upon whose boards we sit. 
As it is now, since we own no appreciable interest in the 
property, what we say does not receive the attention which 
it would if we represented a substantial ownership. We 
will have more to say as to the policy of the railroad if we 
own more stock." "I do not agree with you," said the 
other. "Supposing that fourteen years ago you sat on the 
board of the Union Pacific Railroad and owned the major- 
ity of the stock, which might have been purchased at that 



68 ESSAYS AND SPEECHES 

time at about ten cents on the dollar, and that you out- 
lined at great length a policy for the road before its assem- 
bled directors. When you finished a little man with black 
eyes and spectacles and a black mustache, with his elbows 
on the table down at one end of it, would start in to give 
his ideas of the policy for the road and in thirty minutes 
would make your policy look like thirty cents. Who would 
have controlled the policy of that road at that time? You 
with your stock or Harriman with his knowledge and 
brains? What we want is brains and information, not 
stock." [Applause.] 

So I say that to-day these men who are exercising great 
power in the United States are not as a rule men exercis- 
ing that power through the ownership of stock themselves, 
but because they have brains and information and char- 1 
acter; — because they do the right thing. The division of 
all wealth would only increase the power of such leaders. 
If we had the propaganda of some Idealists in effect and all 
property was divided per capita in the United States, the 
wielding of power would be as great for men of character 
and brains as it is at present, and as it is in every commu- 
nity where industry is diversified, and it must be diversified 
in order to have civilization. And let me tell you something : 
The man who follows the leadership of another man with 
his money, in my observation, demands a much stricter 
accounting than the man who simply follows a political 
leader with his vote. How many men would last as leaders 
of financial power through their influence over the invest- 
ing classes of the country if they appealed to the preju- 
dices of the people instead of to their reason as do many 
of the demagogic leaders of to-day? I would not include 
all politicians in this indictment, as I would not include all 
financiers in this eulogy. The demagogue is to the states- 
man what the "get-rich-quick " mining-stock promoter is 



ADDRESS AT H. M. BYLLESBY BANQUET 69 

to the kind of financier I am discussing. In the manage- 
ment of all business there must be centralization of re- 
sponsibility properly supervised, and also centralization of 
power. We cannot get rid of that in this country, we 
should not get rid of it; and the great trouble is to-day that 
an effort is being made systematically to create the impres- 
sion in the minds of the people that in some way the cen- 
tralization of power and responsibility in connection with 
the operation of great corporations is detrimental to the 
country and in some way closes the opportunity for indi- 
vidualism in the United States. Out of that has come very 
largely the great crusade against corporations under the 
provisions of the Sherman Anti-Trust Law. This is a law 
which, if literally enforced, will largely stop business in the 
United. States — a law which would make us the laugh- 
ing-stock of such great competitive commercial nations 
as England and Germany. We should be governed by 
laws made in conformity to the business progress of the 
times, framed by constructive men and not by demagogues. 
And now, when we need from our statesmen constructive 
suggestions by which this antiquated law which is so dan- 
gerous to our national commercial progress may be changed 
for the better, what do we hear from many of our politi- 
cians? A demagogic appeal to the great masses of the peo- 
ple that, now that the Supreme Court of the United States 
has read into the law the word "reasonable," they, the 
friends of the people, should be supported in an effort to 
change the law back into something which will be unrea- 
sonable, and get it into that shape where it can be more 
successfully used as an instrument of attack upon the con- 
structive industries of the country. One of the things which 
business men must do in this country if we are to proceed 
and progress, as we will, — for I am not a pessimist, and I 
realize these annoyances must of necessity come up from 



70 ESSAYS AND SPEECHES 

time to time in the great advance and progressing pros- 
perity of all forms of industry in the United States, — 
what we must do as business men is in some way to be 
heard upon the subject by the people. 

The public utility business, because of the fact that it is 
a natural monopoly, has been free recently from many of 
the annoyances which harass people who are engaged in 
the great competitive industries of our nation, and in this 
respect this particular business is peculiarly fortunate. 
The flow of capital through the medium of the parent 
company into the subsidiary public utility corporations has 
not encountered obstructive tactics to the same extent as 
have enterprises which are in competition. But how about 
the man who is forced, for the preservation of the interests 
of the stockholders of any great corporation doing an inter- 
state business, into some sort of cooperative effort? Can 
he be certain that he is not in jeopardy under some pos- 
sible construction of this law? Under this law, as inter- 
preted by the recent court decision, the fixing of crime is 
a matter of administrative discretion instead of a matter 
of administrative duty, as the fixing of crime should al- 
ways be. [Applause.] 

The situation is far from satisfactory, even after this 
Supreme Court decision. What is the difference in the 
situation as it confronts a business man now, after the Su- 
preme Court has held that reasonable agreements in re- 
straint of trade may be made, as compared with the situa- 
tion before that decision was rendered, when, under the 
strict reading of the statute, any agreement whatever in 
restraint of trade was unreasonable and those engaged in 
making them were liable to indictment? The only differ- 
ence is this — that, whereas, under the old interpretation, 
the business man knew, when he entered into an agreement 
in restraint of trade, whether reasonable or not, that he 



ADDRESS AT H. M. BYLLESBY BANQUET 71 

certainly could be held criminally under the law of the 
country, now, if he has entered into such an agreement, 
he may be held a criminal. That is all. [Laughter and 
applause.] 

What is the definition of reasonableness? Let us con- 
sider the case of men who deal in perishable commodities 
such as fruit, meat, butter, or eggs. Suppose that they 
enter into an agreement that they will ship only five cars 
of perishable commodities per week into a town which can 
only consume five cars, instead of shipping ten cars. Such 
an agreement, coupled with an arrangement to sell at a 
reasonable price, would result in saving a waste of perish- 
able commodities in that community to the extent of five 
cars, a loss of wealth which inevitably and ultimately comes 
out of the consumer. Such men would reasonably suppose 
that such a contract in restraint of trade — there being no 
agreement for unreasonable prices — would be regarded as 
a reasonable contract; but what would prevent the court 
from taking the view that the agreement, having been 
made for the purpose of preventing the sale of an over- 
supply competitively, was for the purpose of extorting a 
price unreasonably high as compared with a price after 
the slaughter incident to the competitive sale of materials 
which otherwise would be utterly lost? How can they 
know in advance whether or not the Department of Jus- 
tice, at its discretion, would put them to the expense of 
defending themselves against a criminal indictment? 

Take the United States Steel Corporation. This corpora- 
tion has been selling at a lower price at times unquestion- 
ably than general conditions of the market would jus- 
tify, and until recently they have been called a good trust. 
Unquestionablv they have lost a good deal of business to 
competitors by maintaining stable prices recently. Now, 
suppose that dull business compels the Steel Corporation, 



72 ESSAYS AND SPEECHES 

from motives of self-preservation, to sell its commodities 
at a lower price than its competitors can sell them, and yet 
the corporation, owing to the lesser cost of a large produc- 
tion, would remain alive. Would it then be a bad trust? 
Suppose it becomes absolutely necessary for the corpora- 
tion, to keep in existence, to sell at the least price it could 
manufacture at a profit. Would not that policy involve 
every man connected with it, and the corporation itself, 
in danger of a legal attack? If they drive out their com- 
petitors, might not the court take the view that every step 
in the combination has been for the purpose of this ulti- 
mate result and that the corporation was liable to dissolu- 
tion, and its officers to trial and imprisonment? This inde- 
finite law places every man concerned in fixing the policy 
of great competitive corporations in jeopardy. 

What is the remedy which the politician urges upon the 
public as a settlement of such a condition? Amend the law 
so that a man cannot rely upon any defense whatever under 
the rule of reasonableness. I see they are commencing an 
action against the magazine trust. What is to prevent 
them from going after the publishers' association in Chi- 
cago? The personal application of an unjust law sometimes 
induces a more careful examination of it, and if the Depart- 
ment of Justice proceeds energetically after the magazines 
and the newspapers it may be that the demagogue may 
not have his ideas exploited in the future so readily as now. 
[Laughter and applause.] There may be some possibility 
of an aroused public sentiment upon this matter because 
so many will be indicted that they will comprise a re- 
spectable minority of the voting strength of the nation. 
[Laughter.] 

Under this law the fixing of crime is left as a matter of 
administrative discretion for the executive officers of the 
Government to determine in their own minds — to make 



ADDRESS AT H. M. BYLLESBY BANQUET 73 

up their minds as to whether any particular action on the 
part of any one of these corporations is reasonable, and 
then to determine in their own minds as to whether or not 
the machinery of the Government should be turned against 
that corporation and its managers under the criminal 
statutes. That is the condition with which we are con- 
fronted now in the United States. Why is it so easy for the 
demagogues to make laws? It is because the transaction 
of public business is left to them and the business men do 
not arouse themselves to the necessity for action. When 
in Rome, in the old days, the middle men commenced to 
make their profits in the building of the aqueducts and the 
installation of public improvements, and the profits of com- 
mercial life became attractive, there was a time when it 
was difficult to find enough men of respectability to fill 
the public offices; and to-day the attractions of business life 
have turned the minds of strong men away from a political 
career to that of a business career. As a result the quality 
of men in public life is deteriorating. Consider the person- 
nel of the United States Senate to-day and its personnel 
twenty-five years ago, and you have an example. We have 
comparatively to-day a very inferior class of statesmen in 
the United States. Look at some of the members of the 
United States Senate — statesmen of the type — but I 
desist. As the Spaniards say, "It is a waste of lather to 
shave an ass." 

What we need in this country to-day is more interest on 
the part of constructive men in public affairs. Is there to 
be a united and earnest effort on the part of business men 
to amend the iniquitous Sherman Anti-Trust Law so that 
under it legitimate business can proceed without dema- 
gogic obstruction? This is one of the greatest of the ques- 
tions which should appeal to us as business men. I thank 
you. [Loud applause.] 



A FORECAST OF GENERAL BUSINESS FOR 1904 

WITH COMMENTS ON PANIC PERIODS IN THE 
UNITED STATES 

(New York Evening Sun, January 2, 190!i) 
In forming any reliable judgment as to business condi- 
tions for any future period, whether long or short, one 
should first well consider past conditions. Unexpected in- 
terferences with the normal laws of business development, 
caused by wars, radical tariff, or monetary legislation, or 
similar unusual occurrences, are liable to disarrange any 
forecast, yet, on the whole, the safest guide as to what will 
probably happen in the future is what has usually hap- 
pened in the past. There seems no reason to expect dur- 
ing the coming year any unusual interference with normal 
business tendencies. We will have a presidential election, 
but probably not involving issues which will alarm business 
men as did those of 1896 and 1900. What general business 
will be next year will be largely determined by what has 
happened in this — just as the course of this year's busi- 
ness was largely determined by the great over-speculation 
of last year. While we have had drastic liquidation in the 
country during the last year, we are past any danger of 
panic. I am distinctly hopeful as to the future and as to 
the immediate future, though we can expect during the 
coming year no such business activity as we have enjoyed 
for the past three years. With these qualifying remarks, 
the following forecast of the business of 1904, and the rea- 
soning upon which it is based, is presented. 

No history repeats itself quite so exactly as financial 



FORECAST OF BUSINESS FOR 1904 75 

history. In countries whose business is done, as in ours, 
largely upon a credit basis, the cycle of business conditions 
which generally recurs may be defined in a very general way 
as follows : — 

First, a panic. 

Second, industrial stagnation and low prices. 

Third, reviving confidence and an increase in the amount 
of outstanding credits, accompanied by higher prices and 
great business activity. 

Fourth, speculation, overproduction, overcapitalization, 
and excessive borrowing, resulting again in the first condi- 
tion, or a modification of it, such as a security panic. 

While this cycle may be regarded as repeating itself in 
our country about once in ten years, there is a marked in- 
crease in the severity of panics occurring at the end of a 
twenty-year period, as compared with the minor disturb- 
ances occurring within that period, and also a marked 
difference in the conditions which follow the great panics, 
as compared with those which follow the smaller security 
panics. What may be called the great elemental panics 
of the United States — the twenty-year period panics — 
have occurred in the following years: 1818, 1837, 1857, 
1873, 1893. Among the minor disturbances which do not 
deserve the name of panics, but which, nevertheless, have 
had their rise in an expanded condition of credits in busi- 
ness, and whose appearance has completed, approximately, 
a ten-year cycle, are those which occurred in the years 1831, 
1848, 1884, and 1903. Other disturbances like that arising 
at the time of the Baring difficulties in 1890 have occurred, 
but a fair consideration of the financial history of the 
United States will suggest, as convenient for purposes of 
comparison, a division into twenty-year cycles, which will 
include the ten-year cycles above mentioned. This we 
may do as follows : — 



76 ESSAYS AND SPEECHES 

First, the elemental panic, such as those which occurred 
in 1837, 1857, 1873, and 1893, during which there is not 
only the collapse of speculative credits, but a general fright 
among small creditors and bank depositors, causing a 
great contraction in outstanding bank and business credits 
of all kinds. 

Second, several years of industrial stagnation and low 
prices, such as the years 1873 to 1879 and from 1893 to 
1898-99. 

Third, several years in which credits of all kinds increase 
in volume, prices rise, and business is active and prosper- 
ous, such as the years 1879 to 1882 and 1899 to 1901. 

Fourth, two or three years in which these conditions 
continue and are accompanied by excessive speculation 
on the stock exchanges and elsewhere, resulting in abnor- 
mally high prices, overbuilding and overborrowing on the 
part of manufacturing and railroad corporations, and over- 
capitalization. 

Fifth, a period of drastic liquidation like that of 1884 
and 1903, which, while it does not prove disastrous to legit- 
imate enterprises, wipes out large amounts of speculative 
credits, reduces stock prices, and causes the failure of un- 
sound or doubtful enterprises. Such a minor disturbance 
does not affect to any great extent small credits or result 
in the long-continued depression of legitimate industries as 
does one of the great elemental panics ; during which there 
is added to the liquidation of speculative credits the en- 
forced liquidation of bank credits, caused by the wide- 
spread withdrawals of frightened depositors. 

Sixth, a year or so of quiet business, contracted some- 
what in volume as compared with the several preceding 
years, with easy money rates to sound borrowers, and on 
the whole fairly satisfactory. Such a year was the year 
1885, and such will, in my judgment, be the one we are 



FORECAST OF BUSINESS FOR 1904 77 

now entering, — 1904, — and because of this fact it will 
be interesting to go into a few details in this connection. 
The bank disturbances of 1903 in Baltimore, Pittsburg, 
and St. Louis were not so severe as were those of 1884, 
when the Grant and Ward failures and the Marine and 
Metropolitan Bank troubles occurred in New York. But 
the panic of 1884 was chiefly one of securities, as has been 
that of 1903, and in their effect upon prices they were 
about equally severe. In considering the trend of busi- 
ness we may expect during the coming year, we must 
remember that there is a marked difference, as stated be- 
fore, in the effect upon general business caused by panics 
such as those of 1873 and 1893 and security panics such 
as those of 1884 and 1903. 

Henry W. Cannon, Comptroller of the Currency, in his 
report to Congress on December 1, 1884, said: — 

The crisis of May, 1884, seems to have been even more unex- 
pected to the country than that of 1873. Although many conser- 
vative people had predicted that the large increase in railroad 
and other securities, and the general inflation which had been 
going on for a number of years, would bring financial troubles and 
disasters to the country, it was nevertheless generally believed 
that the depreciation of values and the liquidation which had al- 
ready been going on for many months, and the further facts that 
the country was doing business on a gold basis, that the prices 
of all commodities were already very low, that an increased area of 
country was under cultivation and that the prospects were excel- 
lent for good crops, together with the larger distribution of wealth 
throughout the Union, would prevent a repetition of the panic of 
1873. This general belief was measurably correct, as the panic or 
crisis was confined principally to New York City, although its 
effects were more or less felt in all parts of the country, and the 
liquidation resulting therefrom has not yet been fully completed. 

While Mr. Cannon wrote but a short time after the 
security panic of 1884, his distinction as to the effects of 
the 1873 and 1884 disturbances proved correct. 



78 ESSAYS AND SPEECHES 

Probably the best index of the general business condi- 
tions of the country as reflected from year to year is found 
in the records of the transactions of the New York Clear- 
ing-House, through which such a large percentage of the 
business of the country is cleared, and therefore its volume 
is in a sense registered. A consideration of the following 
figures fairly shows the relative effects of the 1873 and 
1893 panics on business as compared with that of 1884 : — 

1873 $35,461,000,000 

1874 22,865,000,000 

1875 25,061,000,000 

1876 21,597,000,000 

1877 23,289,000,000 

1878 22,508,000,000 

1879 25,178,000,000 

1880 37,182,000,000 

1884 34,092,000,000 

1885 25,250,000,000 

1886 33,374,000,000 

1887 34,872,000,000 

1888 30,863,000,000 

1889 34,796,000,000 

1890 37,660,000,000 

1893 34,421,000,000 

1894 24,230,000,000 

1895 28,264,000,000 

1896 29,350,000,000 

1897 31,337,000,000 

1898 39,833,000,000 

The deductions from the above figures are obvious. 
From an elemental panic like 1873 or 1893 the time neces- 
sary to recover prosperous conditions is from six to seven 
years. From a security panic like that of 1884 and 1903, 
not affecting materially bank deposits or credits, one or 
two years should restore approximately the old conditions, 



FORECAST OF BUSINESS FOR 1904 79 

so far, at least, as the volume of legitimate business is con- 
cerned. We can now consider the remainder of the cycle. 

Seventh, several years of increasing credits, active busi- 
ness, and rising prices similar to the years 1887, 1888, and 
1889. 

Eighth, a culmination of the foregoing conditions and 
an era of high speculation, such as the years 1891 to 1892. 

Ninth, an elemental panic like 1893, which, therefore, 
in all probability, will not occur again for quite a number 
of years. 

That such will be the course of business in the future 
no one can maintain further than to say that, judging from 
the past, it is likely to be so. It is well to remember that 
the steadily increasing tendency toward conservatism in 
banking methods and management, and the increasing 
movement on the part of banking communities toward 
mutual helpfulness in the detection of unworthy applica- 
tions for credit as well as in the meeting of local emergen- 
cies in times of financial trouble, as was illustrated recently 
in the cases of Pittsburg, Baltimore, and St. Louis, all 
make for more stable and safe conditions under which the 
periodical adjustment of too-expanded credits hereafter 
can probably be accomplished with a less degree of em- 
barrassment to general business than heretofore. 



CORPORATION REFORM 

PRACTICAL PROBLEMS FOR THE INVESTING PUBLIC 

(Saturday Evening Post, January 28, 190&) 

There is at present in this country much talking on the 
subject of corporations and the creators of corporations. 
This is natural enough, for not only is the subject impor- 
tant, but inactive men and inert things do not interest 
other men in this rushing day, and the business critic, to 
get his audience, must swing his battle-axe at the doers 
and not at the drones. The world gives quick applause to 
the reckless critic. To the young man, ambitious to be 
known, the swift road to public notice is through denun- 
ciation of the work or personality of others. The long, hard 
road to general public respect may commence in criticism, 
but it must be honest criticism designed to destroy evils, 
not simply individuals, except as necessarily involved in 
the destruction of evils; and then this road must lead to 
constructive efforts and finally to the patient bearing of 
the criticism of others — for it is the doer of things who 
now and always must stand, as in the past, the shining 
mark for both the fair and the unfair critic. 

This article is to be no defense of the abuses of corpora- 
tions, or of the persons who may have abused the powers 
given by corporation laws to the injury of their fellows. 
Nor is it to be a criticism of the critics. But, owing largely 
to the usual psychological effects of long-continued pros- 
perity upon trends of public thought, criticism is running 
riot in the country, as it did in 1892 and many other times 
in our past, much of it being useful, but much of it exceed- 
ingly harmful to the public good. In such circumstances 



CORPORATION REFORM 81 

there is no reason why simple methods of thought are less 
valuable or less needed now than at those past times in our 
commercial history. If as individuals we feel that common 
sense is a remedy for our undue mental excitement, we 
need fear harm at no time from an overdose of it. The 
critic has so large a share of the field of public attention in 
these days that many people seem drifting toward wrong 
notions of the modern corporation, coming to regard it as 
something of a menace instead of a fine product of centu- 
ries of commercial evolution — still imperfect, to be sure, 
but one of the greatest agencies in upbuilding the general 
prosperity and happiness of the race that the world has 
known. This, in my judgment, comes from the refusal in 
current discussions to consider what portion of present 
abuses are due to the business device called a corporation 
and could not exist without it, and what are due to per- 
verted human nature and therefore will exist as long as 
human nature does — corporations or no corporations. 
Let us consider this matter with the purpose of getting 
clearer ideas of what abuses of corporations can be reme- 
died by our laws, and from what abuses nothing but our 
common sense as individuals can save us. 

For our purpose we will define a corporation as a mod- 
ern device which provides for the division of the owner- 
ship, risks, profits, and control of a property or business 
among the individuals owning and operating it, and then 
collectively represents them and their successors or assigns 
in relation to the public. The corporation owes its exist- 
ence, among other things, to the impracticability of the 
cooperation of many owners under copartnership agree- 
ments or contracts. It is most essential to remember that 
a corporation is inherently a contract among men. The 
nature of the contract differs in different corporations, 
and hardly any two corporations are exactly alike. Now, a 



82 ESSAYS AND SPEECHES 

corporation may be created to carry out a fair contract 
between men or an unfair one. If we as a people did more 
in translating into terms of simple contract the proposi- 
tions designed to be effected through incorporations, we 
should not only lose less money to tricksters, but should 
distinguish more between evils due to corporation laws 
and the device, and those due to the particular corpora- 
tion under complaint. 

In the vast majority of cases in corporations complained 
of, the trouble arises from the translation into corporate 
terms of an unfair proposition as between the individuals 
interested, not from watered stock or alleged defects in 
corporation laws. Let us construct one or two corporate 
equations from their simplest terms — in other words, 
translate the relations of individuals into corporate rela- 
tions of classes of stockholders similarly situated. As one 
of the fundamentals of this kind of financial mathematics 
we will find that we cannot extract a fair contract from an 
unfair corporation, and, conversely, cannot construct a 
fair corporation from an unfair contract. And it may be 
said here that a good many of our successful corporations, 
as well as corporation promotions, will not stand the test of 
such analysis, and that many unsuccessful ones will stand 
it. An " unfair " corporation may be successful and make 
money. A "fair" corporation may be unsuccessful and lose 
money. But, other things being equal, the "fair" corpora- 
tion survives, and the form of analysis which we are en- 
deavoring to point out will help the investor to distinguish 
it from its unfair neighbor. 

Now, to illustrate : A, of long and special business experi- 
ence, desires further to develop by new capital a successful 
plant and business worth $200,000. B, with $500,000 capi- 
tal and confidence in A, wants an interest in the business, 
bringing a certain income combined with safety for his 



CORPORATION REFORM 83 

principal. He is willing to take less income from the busi- 
ness than A in consideration of a less degree of risk and 
A's management. As a fair partnership agreement, A and 
B draw up a contract providing : — 

1. That B's contribution of $500,000 to the business shall 
first receive out of the profits six per cent, and in case of 
dissolution shall be paid back out of the partnership assets 
before A receives anything. 

2. That A is then to have, out of the profits remaining, 
six per cent on the $200,000 property and business con- 
tributed by him, and in case of dissolution, shall receive 
his $200,000 back after B has received his $500,000 and 
interest. 

3. That any profits over and above the six per cent 
before provided for both A and B shall be divided in 
the ratio of two thirds to A and one third to B, and that, 
in case of dissolution, the surplus left after the repay- 
ment with interest of the respective contributions to the 
business as before provided, shall be divided in the same 
ratio. 

4. That A is to have sole charge and conduct of the 
business. 

To such an agreement, equitable and desired by both 
parties, expressed in a limited partnership contract, the 
public would, of course, take no exception. By means of 
such a contract idle capital is employed, pay-rolls are 
created and wages distributed to the community, which 
thus shares in the benefits incidental to the creation or 
development of any useful industry. 

Now, we will suppose that A has no single B with $500,- 
000 for investment, but has one hundred B's with $5000 
each, all desiring an interest in the same contract which 
appealed to the single B. Among other methods of ex- 
pressing this contract in terms of a corporation — since it is 



84 ESSAYS AND SPEECHES 

impossible for A to take in one hundred limited partners — 
the following would be a simple one : — 

1. Stock, $500,000, preferred first as to principal and six 
per cent cumulative dividends, to go to the B's. 

2. Stock, $200,000, preferred second as to principal and 
six per cent, to go to A. 

3. A certain amount of common stock to be divided in 
the ratio of two thirds to A and one third to the B's. 

The minimum issue of common stock would be fixed at 
that amount, of which A, receiving two thirds, would then, 
with it and his $200,000 second preferred stock, have a 
majority of the stock of the corporation. Now, this latter 
issue of common stock would ordinarily be called "watered 
stock." It is not watered to enable A to sell the corpora- 
tion, but to keep certain his managerial control over it. 
This common stock might be regarded as representing the 
value of the good-will; but as a matter of practice the 
common-stock issues of corporations are as much deter- 
mined by considerations of control as by any ideas of the 
value of good- will. We should keep the foregoing illustra- 
tion in mind in connection with what is said further on 
relating to watered stock. 

But now, having considered the translation of a fair 
contract into a fair corporation, let us consider how a cor- 
poration can be used to cover up an unfair agreement. We 
will take first an oil company, one of those with which the 
readers of financial advertisements are familiar. Oil wells 
with a settled production generally sell, as between indi- 
viduals in the oil country, at a certain price per barrel of 
daily oil production. Since the production is temporary, 
the purchaser expects to receive a very large return at first, 
for in order to make him a final profit he must receive back 
not only his interest, but his principal, before the wells go 
dry. On an investment of $30,000 in producing wells we 



CORPORATION REFORM 85 

will suppose that the purchaser would at first receive from 
sales of oil $2000 per month. The rate he would at first 
receive on such an investment would vary in different 
fields and under different circumstances, but it would al- 
ways be more than an ordinary interest return. Let us 
assume that the purchaser now desires to get an unduly 
high price for his property by deception practiced through 
a corporation. He proceeds, we will say, to capitalize his 
oil wells at $100,000 — the temporary large income at first 
enabling him to pay from one per cent to two per cent a 
month dividends for the time necessary for him to sell his 
stock. If, by showing such dividend payments, he succeeds 
in selling his stock at par, he has received $100,000 for 
what is worth $30,000. 

This has been done by fixing the attention of an unwary 
person upon stock which is made to seem cheap by high 
dividend payments, and diverting it from that which is the 
essential thing — the relation of the intrinsic and convert- 
ible value of the portion of the oil production represented 
by each share of stock in the corporation to the price paid 
for it. The schemer may adopt collateral methods of di- 
verting attention from the consideration of the real propo- 
sition presented by his incorporation. He may notify pro- 
spective purchasers that on a certain day the price of the 
stock will be advanced, and that in order to get it one 
must act quickly — or, in other words, without due inves- 
tigation. He thus plays on the natural human instinct of 
avarice, hoping to override the acquired instinct toward 
temperate consideration of all sides of an investment. We 
may well distrust the unknown seller who wants a quick 
trade. 

Let us consider another somewhat common case — a 
corporation founded on an undeveloped mine. A has an 
undeveloped mine, and is willing to give B a one-half in- 



86 ESSAYS AND SPEECHES 

terest for the capital necessary to develop it — half and 
half being the reasonable division between him who fur- 
nishes the opportunity and him who takes the greater risk. 
Assuming that $50,000 was required to develop the mine, 
the fair corporation would issue, in order to express in cor- 
porate terms this agreement, $100,000 stock, which would 
be divided equally between the parties. 

An unfair man, however, who would create an unfair 
corporation might capitalize at, say, $500,000, keeping 
$450,000 stock in return for his mine, and selling $50,000 
stock to get the cash necessary for the development. When 
the cash was paid in for the $50,000 stock, the men who 
paid it own a one-tenth interest instead of a half -interest 
in the mine. It is surprising how many people buy mining 
stock without any conception of the relation of the ques- 
tion of capitalization to the real nature of the proposition 
as advertised. 

Similar illustrations might be given indefinitely. They 
seem rudimentary; but, in the case of many corporations, 
a method of analysis such as this, simple as it may seem, 
may open the eyes of the wisest when applied to some of 
the great industrial promotions of the day as well as to 
some of the smallest. 

No man in the purchase of stock or bonds has given the 
proper consideration to his transaction until he has com- 
prehended fully the terms of that underlying contract, ex- 
pressed in its simplest form, which is involved in every 
corporation in existence. 

It is easy to understand, from illustrations like the first 
given in this article, that watered stock is not only not 
necessarily unfair between stockholders, but often essen- 
tial to the complete fulfillment of fair arrangements be- 
tween them. This device, harmless and often necessary in 
itself, has — through its association with efforts of corpora- 



CORPORATION REFORM 87 

tions and individuals to dispose of stock at fictitious prices 
— come to be very widely condemned. So immensely large 
is the volume of watered stock in this country, issues alike 
by both large and small corporations, that it would seem 
even to a prejudiced observer that it must subserve at least 
some good uses, because if it were wholly wrong, it would 
be inconceivable that business men should so generally 
sanction it. 
Thomas B. Reed once said: — 

Those things which push themselves forward, and by slow de- 
grees force themselves upon the attention of mankind, are un- 
conscious productions of human wisdom, must have honest con- 
sideration, and must not be made the subject of unreasoning 
prejudice. Above all, no one has the right to presume such a 
movement wrong. It may be wrong; but when business men all 
over a great nation pursue the same course the presumption 
ought to be that they are right. Notwithstanding, the first idea 
is to make them stop. 

Stock in the modern corporation represents not only 
ownership, but the location of control. The stockholders 
of a corporation may unanimously desire permanence of 
control in a certain set of men, in which event they might 
find it impracticable to have stock issued only in an amount 
equal to the cash value of its property. The notion that 
s*tock is always watered to sell or to perpetrate some fraud 
is erroneous. The public is not necessarily injured because 
stock at par does not always represent an equal amount of 
cash or its equivalent. 

Varying values in corporation assets are reflected in the 
selling or market value of the stock — not by constant 
alterations in the stock issues themselves. Dishonest men 
may, and do to some extent, use watered stock to create 
impressions of value which does not exist; but the abolish- 
ment of watered stock would not materially hinder them. 



88 ESSAYS AND SPEECHES 

Wrong impressions and overvaluation of stock worth par 
or above par are created as easily as in the case of watered 
stock worth less than par, and generally by similar meth- 
ods. Stock exchanges through the improper manipula- 
tion of operators are frequently used to create wrong im- 
pressions of stock values; but in such cases, and all cases, 
it is not the water in the stock that causes the chief trou- 
ble among unwary investors. It is the water in the prices 
they pay for it. And that kind of water may be found at 
times irrigating with remarkable impartiality purchases 
of stocks at all prices above and below par. 

Since it is human nature to want what others want, or 
seem to want, the creation by manipulation on stock ex- 
changes of an apparent demand for a stock is often fol- 
lowed by a real demand for it from the public or "out- 
siders." If, through such methods, the outsider buys a 
stock at an excessive price the harm is done whether the 
stock bought at the excessive price was intrinsically worth 
par, below par or above par. 

Economists tell us that the value of a thing depends 
chiefly upon its exchangeability. At times the appearance 
of exchangeability, or rather marketableness, of stocks at 
certain prices is sustained artificially by manipulation until 
the outsiders have absorbed the amount of stock on hand 
to be marketed. Then, to their surprise, the stock sud- 
denly loses marketableness except at a lower range of 
prices. It would seem that agreements are not uncommon 
on the part of real owners of stocks to withhold them from 
the market so as not to interfere with the manipulation of 
market quotations on small transactions in such a way as 
to induce purchases at a higher range of prices. 

But here, as in all business, the wrong consists not so 
much in the arrangement as in its purpose — whether it 
is intended by its means to sell to ill-informed people some- 



CORPORATION REFORM 89 

thing for a price known by the seller to be excessive, or, on 
the other hand, to be fair and reasonable. Underneath all 
devices which brilliant or bungling men use to sell their 
wares is the question of intent — the intent to gain fair 
profits through fair dealing, or the intent to make unfair 
profits without that due consideration for the rights and 
interests of others which every honest man has. 

It is claimed, however, that watered stock in the case 
of natural monopolies like railroads, water works, gas and 
electric companies, tends to prevent reductions in rates. 
My observation as a business man is that corporations 
endeavor to make the maximum profits in any business 
which are consistent with its preservation and proper de- 
velopment. If they reduce charges voluntarily it is not 
because they feel that they are earning too high a rate of 
dividend upon their capitalization, but because by the 
reduction and consequent increase in business they expect 
to make a larger net profit and eventually pay higher divi- 
dends. There is little altruism in corporate policies. Lib- 
eral policies are generally just as much aimed at high 
profits as narrow policies. The different policies are the 
result of different views as to which policy — high prices 
or low prices, broad management or narrow management 

— will, in the long run, give safely the highest profit. 
The Standard Oil Company, whose stock sells around 

640, and cannot be considered watered; the United States 
Steel Company, whose common stock now sells around 30, 
and is considered somewhat aqueous; the Pennsylvania 
Railroad Company, whose stock now sells around 138; 
and the Erie, whose stock now sells around 39, — all are 
seeking to make the highest profits possible in their busi- 
ness without destroying or diminishing it. If they are not, 

— under some theory that they owe it to the public not 
to make so high a rate of earnings upon their capitaliza- 



90 ESSAYS AND SPEECHES 

tion, — let some one prove it and see how long the stock- 
holders will allow that kind of a management to stay in 
power. Now, our argument is not to the effect that the 
Government or the municipality should have nothing to 
do with corporations operating under special franchises. 
It is to the effect that, if the Government or municipality 
is to correct unreasonable rates of charge, they should do 
it directly and not by laws interfering both with rates and 
with capitalization. 

Capitalization is inherently a matter of private contract. 
It is one of the means by which a company puts itself into 
condition to render public service. To limit by law the right 
to devise means, except they be fraudulent, is to limit to 
some extent the moral right to demand certain results. The 
people have a right to demand of their public service cor- 
porations good service at reasonable rates. 

If the Government or municipality has fixed or limited 
the capitalization of the natural monopoly it has limited 
its moral right to impose rates which may be otherwise 
reasonable for the community, unless, at the same time, 
they afford a reasonable return upon the actual investment 
represented by stocks or bonds at par. But suppose the 
proceeds of the bonds and stocks at par have been so un- 
wisely expended that the company cannot properly serve 
the community at what would be reasonable rates in ordi- 
nary circumstances, and still receive a proper return upon 
its investment. By this limitation on capitalization the 
tendency is to saddle upon the community the cost of any 
indifference or incompetency in handling the business. 

We have, in this country, a good illustration of the ad- 
verse effects upon the public of what may be considered 
the paternal protection and regulation of the capitaliza- 
tion of corporations operating natural monopolies. This 
is the Massachusetts Gas Commission Law. Many econo- 



CORPORATION REFORM 91 

mists have long praised this law, professing to see in its 
limitations upon the rights of capitalization and the rate of 
earnings thereon, benefits to the community. Within the 
next few years, however, if not sooner, I think impartial 
economists will be practically a unit upon the failure of the 
law in its present form properly to conserve the best in- 
terests of Massachusetts gas consumers. The criticism is 
not of the right of the commission to regulate prices of gas, 
but of the policy of regulating capitalization. 

The effect of the Massachusetts law has been to discour- 
age proper efforts to better the service or reduce rates after 
the stockholders received the limit in the rate of dividend 
legally allowed them. Massachusetts gas consumers, as a 
whole, are now being injured in the matter of both gas 
service and gas rates as compared with companies in other 
States operating some of them under restrictions as to 
rates, but all without restrictions upon the right of capi- 
talization. As someone has said, many Massachusetts gas 
companies, paying their regular dividends upon their lim- 
ited capitalization, have gone to sleep. 

Many of them, if notified simultaneously of compulsory 
cheaper prices for gas and freedom to capitalize in any way 
they please, provided it would not involve fraud on any 
one, would immediately modernize their business, increase 
their mileage of mains and better their service in order to 
induce the larger consumption necessary to reduce the cost 
of production and to produce the old or a larger rate of 
profits. Leading economists are already recognizing the 
defects of this law, formerly so universally praised. Its 
main defect is interference in capitalization, designed to 
prevent stock-watering. It prevents it, but, by so doing, 
it interferes with the proper protection which the commis- 
sion should afford the public in the way of imposing rea- 
sonable rates upon gas companies. 



92 ESSAYS AND SPEECHES 

And so it would be with railroads, waterworks, and elec- 
tric light companies. As it is with such corporations, so 
it would be with corporations operating in competitive 
business. 

The proposed laws to reform corporations should not 
interfere with capitalization except to prevent fraud, and 
fraud is not inherently involved in watered stock. They 
should recognize that appraisement of property through 
stock issues does not mean realization on them. Such laws 
should be most carefully considered and should be aimed 
at the prevention of fraud by means of watered stock, not 
at the abolition of the right of owners of property both to 
appraise and manage it through stock issues. If we tamper 
with watered stock by legislation in an inadvisable way 
we may not only fail to secure relief from its alleged evils 
but most seriously handicap our business and commerce. 

The investigator into proposed laws to regulate corpora- 
tions must give proper thought to the business contracts 
as between individuals which are implied in great corpora- 
tions. The problems of to-day relating to corporations are 
first those relating to the misuse of corporation laws in 
order to disguise unfair contracts through involved corpor- 
ate charters and security issues, and, second, those relating 
to the attitude of Government toward corporations which 
have grown to such size that they have come into relations 
with the people at large, often by the reduction in the price 
of a commodity to the point where competition by others 
is unprofitable. In the latter cases, where this result is due 
to the enjoyment of special privileges, interference by law 
is demanded to abolish such privileges. 

In regard to the first class of problems — and it is with 
these that this article has been chiefly concerned — if I 
have rightly interpreted the idea of " publicity/ ' it has for 
at least one of its purposes the aiding of the prospective 



CORPORATION REFORM 03 

or present stockholder to a clearer perception of the basic 
contract underlying the corporation of which he is or pro- 
poses to be a part owner. While efforts along this line 
involve many debatable questions as to invasion of private 
rights by Government, they will not be opposed by many 
properly organized corporations. When all is said and done, 
however, we shall still find the business man relying chiefly 
on himself for protection from imposition. Let us quote 
Thomas B. Reed once more: — 

Almost everybody announces that what we need is " publicity." 
Even this is vague. Do you expect the public to be intrusted with 
the cost sheets? If you do not, then what will your publicity 
amount to? If you mean by "publicity " such a statement as will 
enable the outsider to buy wisely, or the stockholder to sell at the 
true value, I fear we may be going beyond the province of free 
government, which certainly thus far has left the task of keeping 
his fingers out of the fire to the citizen whose fingers they were. 

One leaves this parting word to the investor: In consid- 
ering any stock investment, remember the simple method 
of analyzing the fundamental contract underlying every 
corporation to ascertain whether, if relating only to sev- 
eral individuals instead of several classes of security hold- 
ers, it would be fair or unfair. Uncover the "intent" of 
corporations, for beneath each one is a fair or unfair one. 
When the unfair one is found, heed the danger flag, even 
though the future profits of the corporation seem likely to 
be so large as to offset the initial disadvantage of the outside 
investor in its securities. Men who propose unfair divisions 
of prospective profits are not likely to be good trustees of 
accumulated profits. 

If there is anything in the signs of the times the United 
States as a whole is passing through a period of agitation 
similar to that which some years ago resulted in the Gran- 
ger legislation in a number of Western States. 



94 ESSAYS AND SPEECHES 

That there should be a change in laws to correct exist- 
ing abuses does not admit of doubt; but it is well to remem- 
ber that laws affecting our highly developed, interdepend- 
ent and sensitive business relations should not involve a too 
radical application of untried remedies. Theodore Roose- 
velt possesses, under the Constitution, not only the right 
of suggestion to Congress, but the right of veto upon its 
action. He has assumed the leadership of an existing public 
sentiment favoring legislative and judicial correction of 
certain corporation practices. To be the true man and 
true leader we all believe him to be it is possible that he 
must finally stand against a tendency toward too radical 
legislative action. 

Roosevelt, the man, may be approaching another great 
test. If he accomplishes his purposes in compelling legisla- 
tion, — and the American people who have watched his 
career believe he will, — he must then hold his mind in an 
equipoise which may sorely disappoint the radicals who 
now applaud. 

It is not the highest test of strength to lead aroused pub- 
lic sentiment. The highest test is to oppose it when it is 
wrong. A President loves popularity. To a public man it 
is often the wine of life. And yet the President who does 
right must at times risk its temporary loss. As McKinley 
preserved our national dignity only by risking his popu- 
larity in standing against the recognition of the Cuban 
Republic and those who would rush unpreparedly into war, 
so Roosevelt may have to undergo similar risks for right 
principles in connection with the movement he has inau- 
gurated. That he will be willing to risk all for the right his 
past indicates; and this belief in his willingness is the basis 
of the general confidence that his efforts will lead to im- 
proved conditions and not to chaos and reaction. 



AGAINST INSURANCE OF BANK 
DEPOSITS 

(Chicago Inter Ocean, September 13, 1908) 

In a volume entitled "The Banking System of the 
United States," published fourteen years ago, which is 
devoted to a rather technical discussion of the relations to 
the business of the country of the purchasing power created 
by the building-up of bank credits, I devoted three pages 
to a statement of my belief at that time that a law provid- 
ing for the insurance of deposits would tend to produce a 
stability in bank deposits which would lessen withdrawals 
in times of panic, and therefore lessen the severity of the 
liquidation of loans against deposits incident to a panic, 
which, as we all know, wipes out the purchasing power of 
the country and tends to produce a lower level of prices and 
to demoralize business by an abrupt lessening of the circula- 
tion of all money. This includes not only that issued by the 
Government, but the money in terms of which the bulk of 
our business is done, to wit, drafts and bills of exchange, 
which may be termed "bank-credit currency." 

At that time I had not devoted myself to a thorough 
study of the question of bank-deposit insurance, but when 
I was appointed Comptroller of the Currency in 1898 one 
of the first tasks to which I set myself was the study of 
this question, long before it became a matter of general 
discussion in the country. It was my desire when I en- 
tered office in my first report to Congress to embody a 
recommendation of such a law, and I had the Government 
experts make a statistical investigation of the question. 
To my regret, I found I could not bring myself to the 
support of the proposition. 



96 ESSAYS AND SPEECHES 

It would unquestionably have been a popular recom- 
mendation to make, as the superficial advantages of such a 
system are many, the greatest in my judgment being the 
one which I have endeavored to point out in the volume to 
which I have above referred. Yet when I contrasted the 
fundamental objections, to which I will refer below, with 
the theoretical advantages which might be gained by the 
law, I found myself in no doubt as to the position I took. 

Referring to this position, I have written two letters 
which I insert below. Both of these letters were written 
before the matter became the subject of issue between the 
Republican and Democratic parties. One of these letters 
was written to Governor Hoch, of Kansas, who requested 
my opinion upon the proposed Kansas law, and the other 
to the Honorable A. J. Hopkins, of the Finance Commit- 
tee of the United States Senate, who also desired my opin- 
ion as to the feasibility of such a general law. These let- 
ters, written at the time they were, will absolve me, I hope, 
from any idea that my opinion upon this financial and 
business measure changed because of the position of two 
great parties thereon. 

The fundamental objection to a system of deposit guar- 
anty is, that if in the minds of our people generally the idea 
is fixed that the safety of their deposits is not dependent 
upon the wisdom and conservatism of the men in the bank- 
ing business who handle them, there will be a tendency on 
their part, because of the extra inducements offered to 
them in the shape of concessions in the rate of interest, 
and otherwise, by irresponsible and reckless bankers, to 
intrust to their use too great a proportion of general de- 
posits. 

The result will be that the business of the country will 
not be upon as sound a basis thereafter as it is now when 
the veto power of the conservative bankers upon specula- 



AGAINST INSURANCE OF BANK DEPOSITS 97 

tive enterprises is one of the great safeguards of sound 
business conditions and general prosperity. 

Many arguments are made as to the injury of such a law 
to the banking community, but my conclusions were not 
reached because of a consideration of these arguments, for 
the banks could well afford, in the interests of the common 
good, to submit themselves to regulations not in violation 
of fundamental rights which would insure greater pros- 
perity and safety to the business of the country as a whole. 
But this law, in my judgment, would not bring about such 
a result. It is unsound from an economic basis, and in the 
general interest of all business should be defeated. 

The following are the letters to which I have referred 
above, both written, as heretofore stated, before this mat- 
ter became the subject of controversy between the Re- 
publican and Democratic parties : — 

Chicago, III., Jan. 11, 1908. 
The Hon. E. TV. Hoch, Governor of Kansas, 
Topeka, Kansas. 

I have your letter of January 6. There is no reason, in my 
judgment, why the State of Kansas cannot provide for a system 
by which, if there was a tax levied on the average deposits of state 
banks, a fund can be created without undue burden upon the 
banks which would be sufficient to provide for the deposits of 
failed banks, thus constituting a practical guaranty of deposits 
by the associated banks of the State. The details of your proposi- 
tion I have not had before me, and, of course, before expressing 
an opinion thereon, I would like to see them. 

While Comptroller of the Currency I had hoped to be able to 
advocate this plan for the national banks, but the detailed statis- 
tical examination which I made convinced me that, because of 
the great disparity in the percentage of mortality of banks in 
different sections of the country, a uniform rate of taxation such 
as would be constitutional, would be unjust. In other words, a 
uniform rate of taxation such as would apply to the United 
States as a whole would violate the fair principles of insurance, 
that the rate should vary with the risk. The history of the system 



98 ESSAYS AND SPEECHES 

showed that the risk taken by depositors in widely different sec- 
tions of the country varied very greatly, owing to the different 
environment surrounding business. I was unable to bring myself 
to recommend the adoption for the national banking system of a 
law ignoring this. These objections would not apply to any par- 
ticular section of the country, such as a State. In Kansas, you 
could very safely, with justice, provide for such a law carrying a 
uniform rate of taxation. The general line of thought which led 
me to advocate, some fourteen years ago, this plan, you will find 
contained in a little book which I published, a copy of which I 
will send you, which, however, I trust you will return to me, as 
this is the only copy I have. 

Charles G. Dawes. 

Chicago, III., March 3, 1908. 
The Hon. A. J. Hopkins, United States Senate, 

Washington, D.C. 
My dear Senator: — 

I do not know that the question of the constitutionality of a law 
providing for the joint guaranty of deposits on the part of the 
banks has ever been passed upon. In my study of the question 
I could not find any authorities in this connection, but it has 
occurred to me that a law providing for the compulsory payment 
by each bank of a fixed percentage of their deposit line for the 
purpose of guaranteeing the combined deposits, which is in effect 
a system of compulsory insurance, violates the fundamental prin- 
ciples of insurance, which is that the rate should vary with the 
risk. My investigation into the matter of the relative risks inci- 
dent to the banking business in different sections of the country 
disclosed such a discrepancy that I did not feel that I could re- 
commend, in my report to Congress, the passage of a law pro- 
viding for a uniform rate of payment by the insuring banks. It 
seemed to me it would violate the constitutional provision that 
all rates of taxation should be uniform. 

If you will take my report as Comptroller of the Currency for 
1908 to Congress, you will find there, in connection with a dis- 
cussion of asset currency, statistics which will show the very 
great difference in the risk, based upon the experience of the 
national banking system that a depositor takes in Nebraska and 
Kansas, for instance, as compared with a depositor in Massa- 
chusetts. 






AGAINST INSURANCE OF BANK DEPOSITS 99 

To be sure, it will be urged in opposition to this that the tax 
necessary to insure deposits will be so small as to make such an 
inequality little felt. If, on the other hand, the effect of the law 
is to create the impression that all deposits are equally safe and 
would throw a larger proportion of the banking business into the 
hands of the weaker concerns, such an objection would not meet 
the point. 

I confess that the theory of making more stable deposit bal- 
ances by such a system of insurance was at first very attractive to 
me, but the line of thought I am now giving you is that which 
finally fixed my conclusions. 

Charles G. Dawes. 



THE ISSUES OF THE CAMPAIGN 

(Delivered at Joliet, Illinois, Saturday Evening, September 15, 1900) 

There are two great issues in this campaign — one 
relating to the domestic prosperity of our nation and one 
involving the relations which our nation now maintains 
towards our new island possessions and to the rest of the 
world. The Democratic Party has claimed that the para- 
mount issue is " Imperialism,' ' a strained and inappropri- 
ate term which they apply to the Administration's foreign 
policy with the purpose of affecting voters thereby. I pro- 
pose to treat this as the paramount issue, but, before so 
doing, wish to speak briefly upon the declaration in the 
Democratic platform, pledging that party to the free and 
unlimited coinage of silver at the ratio of sixteen to one. 

So far as the argument upon the silver question is con- 
cerned, I believe that its fallacies were exposed during the 
last campaign, and if they were not completely demon- 
strated then, the prosperity and higher range of prices in 
the nation since the firm establishment of the gold stand- 
ard has completed the argument. We heard much from 
Democratic orators in 1896 about the conspiracy of the 
gold men into which they entered with the object of having 
the rich man's dollar get too much of the farmer's wheat. 
Especially did we hear about the conspiracy to make the 
dollar dearer in order to make the outstanding mortgages 
which were payable in dollars more valuable and harder 
for the farmer to pay. 

In the course of human events it has transpired that if 
our Democratic friends were right about the conspir. y, 
the conspirators were wrong in their calculations; for rig- 



THE ISSUES OF THE CAMPAIGN 101 

uring wheat at fifty-five cents, which it was much of the 
time in 1896, as against seventy-five cents this summer, the 
man with a thousand-dollar mortgage can get rid of it for 
about thirteen hundred bushels of wheat now, when most 
of the time before the conspirators got to work, it would 
have cost him about eighteen hundred bushels. It would 
seem that the conspirators at this rate lost about five hun- 
dred bushels of wheat to the thousand-dollar mortgage if 
they were in that line of business. There have been times 
since 1896 when the farmer could have relieved himself of 
the mortgage for seven hundred bushels of wheat. 

I think that on this question our people have come to 
see that after all it is not so much the abstract amount of 
silver or the abstract amount of gold that is in circulation 
which alone fixes the supply of money which determines 
prices, but that this supply is made up not only of gold 
and silver, but of Government notes and bank checks and 
drafts, all of which have an equal purchasing power with 
gold when interchangeable into gold on demand. 

Our people see that when the silver people threatened 
the interchangeability of all our money with the best 
standard, they destroyed confidence and drove money out 
of circulation and large lines of credit out of existence. 
And so this Administration enacted a law making gold 
the standard, and assuring the public by this law of its 
safety. Then it was that confidence revived, and money 
again came into circulation and general prices rose even 
though the price of silver continued to fall. 

But now a portion of the Democratic press, in spite of 
the plain and specific declaration of the Democratic plat- 
form, pledging the party, if successful, to the passage of a 
free-silver law, is attempting to make the people believe 
that the party did not mean what it said, and that Demo- 
cratic success will not endanger the stability and honesty 



102 ESSAYS AND SPEECHES 

of our medium of exchange. In order that there may be no 
false impressions about the position of the Democratic 
Party upon this issue, let me call attention to the fact that 
the discussion which arose among the Democrats at Kan- 
sas City as to whether the free-silver plank should go into 
their platform was mainly devoted to the question of the 
popularity of the plank, not as to the validity of the prin- 
ciple it involved. 

The majority of those said to be opposed to free silver 
at Kansas City argued that it should be kept out of the 
platform because it was unpopular, not because it was 
wrong. But even this argument was overridden, and the 
plank was adopted. If the Democratic Party is successful, 
the people are going to believe that they are honest in their 
support of this principle, and if they do believe this, this 
country will have hard times long before a Democratic 
Senate is elected or an attempt is made to pass a free-silver 
law. 

The man with money in the savings bank and the man 
with money loaned is timid. He is going to rightfully as- 
sume that, if the Democratic Party is successful with free 
silver in its platform, there is a reasonable chance of the 
enactment of a free-silver law, and he is in a position to 
take no chances. Many creditors will call for their money 
fearing that it may be depreciated by law and will redeem 
it in gold at the Treasury as fast as possible. Gold will be 
hoarded, and a rapid decrease of the country's available 
cash circulation will draw attention to the increasing dis- 
proportion between the cash and credits of the country. 
Depositors will then become frightened, and we will be in 
danger of a disastrous financial experience. 

The temporary protection which a Republican Senate 
might give the gold standard would probably have little 
effect in preventing that loss of confidence in the stability 



THE ISSUES OF THE CAMPAIGN 103 

of our medium of exchange, which is, above all things, 
essential to the business prosperity of all classes in this 
country and in terms of which all business is done. 

I believe that the continuance of the prosperity of this 
country depends upon the success of the Republican 
Party, which opposes the free coinage of silver because it 
believes it unequivocally a moral and economic wrong. 

Let the man who is not wholly satisfied with the exist- 
ing conditions ask himself the following questions : — 

First. If a Democratic Administration comes into power, 
have I any reason to believe that it can improve industrial 
conditions by means of the legislation recommended by 
them? 

Second. If a radical improvement of existing industrial 
conditions cannot be expected from a Democratic Admin- 
istration, what risk is there of disturbing existing domestic 
conditions adversely by helping to place a Democratic 
Administration in power because I am not satisfied with 
the present foreign policy of the nation? 

I think reflection upon these questions will convince 
such a man that with the issues presented as they are by 
the Kansas City platform, the voters of this country can- 
not stop the nation's progress in the world without stop- 
ping its prosperity at home. 

The realization of this by the Mugwump press is one of 
the few amusing incidents of a very serious campaign. At 
this time in our nation's history the Republican Party 
is the party of achievement and progress, and the man, 
dissatisfied with present conditions and who hopes for bet- 
ter conditions, should work for them through the party of 
progress and not through a party of pessimism. 

In the discussion of the Philippine question, the indica- 
tions are that we may expect to hear two leading lines of 
argument during the campaign. 



104 ESSAYS AND SPEECHES 

One line of argument as to our future course and duty in 
opposition to the Administration's course is based largely 
upon the personal interpretations put upon our Constitu- 
tion, and the sayings of our former statesmen upon other 
subjects, by those who have had no opportunity to per- 
sonally ascertain conditions in the Philippines as they 
actually exist. The other line of argument is based upon 
the consideration of facts and conditions as they are in the 
Islands to-day, and seeks to uphold the wisdom of the past 
and future plans of the Administration by showing that 
under existing conditions they were the only plans which 
were just, right, and honorable. 

Generally speaking, the first line of argument is of the 
nature often resorted to by those not wholly informed of 
the facts in a case, and who therefore are inclined to mag- 
nify the deductions of a false logic as against those of fact. 

Mr. Bryan's academic arguments should be given full 
consideration in public discussions of the Philippine situa- 
tion with its pressing problems; but before the theoretical 
version of the question which Mr. Bryan presents is an- 
swered, it is first in importance in seeking to define our 
national duty to examine facts and conditions as they 
exist, and then, after ascertaining what line of national 
conduct is demanded by conditions as just and right, to 
then see whether it is in conflict, as claimed by Mr. Bryan, 
with those fundamental principles so precious to the Ameri- 
can people. 

Let us, therefore, consider first the conditions that exist 
in the Philippine Islands. It is necessary to do this in 
determining whether we can immediately withdraw from 
them, or, if we stay for a short time, whether we can then 
give them self-government and withdraw — in other words, 
whether we can safely pursue another policy than the one 
inaugurated by the present National Administration. 



THE ISSUES OF THE CAMPAIGN 105 

The population of the Philippine Islands is estimated 
at about 10,000,000 people. These peoples are divided into 
hostile tribes, the chief among them being the Tagalogs, 
who are led by a corrupt scoundrel named Aguinaldo, who 
first plotted the murder and massacre of the soldiers of the 
United States, and foreigners resident in Manila, and after 
being discovered, made a night attack upon our troops. Of 
the sixty tribes into which the Philippine population is 
divided many are continually at war with each other. The 
population is largely Malay, and has among its members 
not a few naked savages and even cannibals. It is indolent 
and its leaders are unscrupulous and corrupt. 

In his speech before the Hamilton Club, of Chicago, 
in November, Professor Worcester of the first Philippine 
Commission, in the course of a considerable discussion of 
the crimes committed by the Filipinos upon their own 
tribesmen, says : — 

In southern Luzon the Bicols had arisen against the Tagalogs 
at several points and were asking for help. The Tagalog general, 
Lucban, had extorted some $200,000 from the inhabitants of 
Samar and Leyte and had put it into his pocket. The people of 
Hohol were calling for aid. The Moros and insurgents had fallen 
to fighting each other in Mindanao, where we had not landed a 
man. Tomas Aguinaldo, an insurgent official and cousin of the 
dictator, had gone to Mamburao, on the west coast of Mindoro, 
and had there organized a genuine piratical expedition with the 
avowed object of plundering the peaceable inhabitants of the 
Calamianes Islands, Palawan, Masbate, Subuyan, and Romblon. 
This plan has been carried out and he has returned to Mamburao 
heavily laden with plunder. ... I could go on indefinitely with 
illustrations, but I believe that those given will suffice. 

It was the unanimous opinion of the first Philippine 
Commission — composed of the following members, 
President, J. G. Schurman, of Cornell University; Pro- 
fessor Dean Worcester; Charles Denby, late Minister to 



106 ESSAYS AND SPEECHES 

China; Admiral Dewey; and General Otis — that the in- 
habitants of the Philippine Islands are at present unfit for 
self-government. 

The standing and character of these gentlemen cannot 
be impugned, and their conclusions, made after a most 
painstaking and careful personal investigation, and after 
months spent in personal contact with conditions in the 
Philippines, must be regarded as conclusive, supported as 
they are by the evidence of other distinguished men who 
have visited the islands. 

The Philippines are a group of islands, nearly one thou- 
sand in number. The inhabitants of the islands lack ra- 
cial unity; and they have in their relations with us thus 
far proved treacherous and unreliable. They have for 
hundreds of years been under monarchical rule and do not 
understand the first principles of self-government. Under 
present conditions their self-government could not result 
in anything but a small, cruel, and corrupt oligarchy, if 
Aguinaldo were recognized and his Government main- 
tained by the forces of the United States. If the United 
States should remove the strong hand of authority from 
the islands there would probably be anarchy. A small 
fraction of the people, represented by Aguinaldo and his 
tribe, could not be recognized as in any way representative 
of the entire population. And if they were representative 
of the entire population, their authority would probably 
mean the massacre of the foreigners in Manila and a reign 
of bloodshed and tyranny. If the United States should 
withdraw its sovereignty from the Philippines it would not 
be liberty which would result, as our Democratic friends 
maintain, but it would be license, and anarchy, and misery, 
and wretchedness unspeakable. 

Now, my friends, it is perfectly evident under these 
conditions which are thus represented to us by all those 



THE ISSUES OF THE CAMPAIGN 107 

who have been in the Philippines, including the first and 
second Commissions appointed by the President, as well 
as by the officers of our army and our diplomatic repre- 
sentatives in the Far East, that the Filipinos are at present 
incapable of self-government in the American sense of that 
word. This is the attitude of the Administration, deter- 
mined by its conservative consideration of conditions. 

We may discuss every plan which could be made for the 
future of the Filipinos, and, if the recognition of their pres- 
ent incapacity for self-government is not involved in it, 
we must confess that plan a failure whenever we confront 
and reason upon conditions in those islands as they are. 

Now, the effort of Mr. Bryan and the Democratic 
Party is to get our people to believe that in some way this 
attitude of the Administration toward the Filipinos vio- 
lates certain principles which we have always upheld and 
maintained in this nation. They maintain that we should 
give the Filipinos self-government. But they do not dis- 
cuss at length with us their capacity for self-government. 
They say that we have no right to ask whether they are 
capable of self-government; for if we should decide they 
were not, then we would make them subjects, not citi- 
zens, and that would be " imperialism.' ' These theoreti- 
cal arguments, of course, assume by implication that these 
sixty different tribes of savages and semi-civilized Malays 
are capable of self-government, or, if they are not, that the 
American people are estopped from recognizing the fact. 

In order that we may get right notions on these funda- 
mental matters, and relieve the perplexity of any one who 
feels that there is anything in the attitude of the Adminis- 
tration, however necessary it may seem from the stand- 
point of conditions, which is inconsistent with the highest 
principles of justice, let us reason a little on the question of 
self-government. 



108 ESSAYS AND SPEECHES 

Among the inherent rights which men possess is the 
right to life, liberty, and the pursuit of happiness, and so 
far as these rights are concerned, all men are created equal. 

But while the enjoyment of these rights makes a man 
under any government a self-governing man and a free 
man, it makes him so only in so far as his freedom does not 
interfere with or infringe upon similar rights to other men. 
Liberty to the individual is not inconsistent with the con- 
trol over him of the government under which he lives, and 
while government fixes the limits within which the man 
can govern himself, it also fixes a limit beyond which he 
cannot go because he then infringes on the rights of others 
and the rule of the greatest good to the greatest number is 
transgressed. 

Now, when under this Government of the United States, 
or any government, an individual shows, even within the 
limits of the free action which the law allows, that he is 
unfit to be entrusted with the individual right of self-gov- 
ernment for the reason that he infringes upon or endangers 
the lives and liberty of others, then the Government inter- 
feres with his individual self-government and puts him 
under restraint without his consent. Among those thus 
held under restraint in this country are the American 
Indians. 

Now, my friends, a government represents only a collec- 
tion of individuals, and is the means by which each indi- 
vidual is protected in his right to life, liberty, and the pur- 
suit of happiness, because it imposes just such restraints 
upon individuals who menace those rights. That which is 
most important in all human governments is the protection 
of these rights of the individual, and the great desideratum 
in government for any people is that form which will bring 
the greatest good to the greatest number by insuring to 
the individual his inalienable rights. The protection of 



THE ISSUES OF THE CAMPAIGN 109 

these rights is the fundamental thing; and the form of gov- 
ernment which best protects them is self-government with 
peoples who are capable of self-government, and it may 
be some other form of government with peoples who are 
incapable of self-government. 

There is no right of self-government — so called — in 
the Filipinos unless that form of government can be estab- 
lished which will insure to the individual there reasonable 
protection to the inalienable rights secured by government 
to the individual here. Whenever a so-called self-govern- 
ment cannot insure these rights to its citizens, it has no 
more right to freedom from restraint in the community of 
nations than any individual, incapable of proper self-con- 
trol, has in the community in which he lives. 

And so, among nations as among communities, there are 
certain ones which need restraint. Thus it is that in the 
community of nations Turkey is restrained. There is no 
such thing as an inalienable right on the part of a govern- 
ment to freedom from interference from other governments 
unless that government so protects the rights of its indi- 
vidual citizens that the plain principles of humanity are 
not violated. It was in recognition of this principle that 
our Government rightfully fought the war with Spain. If 
Spain had been a self-governing republic, instead of a mon- 
archy, when she outraged every principle of humanity in 
Cuba, the war of interference would have been waged by 
the United States for humanity's sake just the same. 

If the Filipinos are incapable of self-government, it 
matters not what their government be called; the fact re- 
mains that when the United States leaves, some other na- 
tion or nations will take up their government. And the 
United States has no right to interfere with that nation or 
nations unless she is willing to again step in and restore 
order, and guarantee to the residents of the islands, includ- 



110 ESSAYS AND SPEECHES 

ing resident foreigners, life, liberty, and freedom from the 
terrors of anarchy and savage massacre, of which they have 
already been once in deadly peril. 

The Democrats in this campaign ignore the question as 
to what will happen to the rights of the majority of the 
individual Filipinos if they are allowed a so-called self- 
government, for the discussion of what they call the right 
of the Filipino race, or rather races, to self-government. 

We maintain that the proposition that the Filipino races 
should have self-government becomes fundamentally im- 
portant only when it is demonstrated that the so-called 
self-government will protect the inhabitants of the islands 
in their individual and inalienable rights to life, liberty, 
and the pursuit of happiness. It is well, in the midst of 
the assertions of our opponents, that we are opposing the 
principles of freedom in advocating the control of the 
United States over the Filipinos, to remember the follow- 
ing truths : — 

First. That freedom is something of primary impor- 
tance, first to the individual. 

Second. That no matter by what name we may call a 
government it is not a free government unless it is able 
to protect its individual members in their inalienable 
rights. 

Third. That if the United States is not convinced that 
upon its withdrawal a so-called self-government of the 
Filipinos can secure to the inhabitants of the islands, in- 
cluding its foreigners, their rights to life, liberty, and pur- 
suit of happiness, when by retaining sovereignty it can do 
so, then the United States strikes a blow at the freedom of 
10,000,000 people and lets them pass into the control of 
some foreign monarchy, or, what is infinitely worse, into 
the hands of a half-savage and cruel oligarchy, probably 
headed by the briber and assassin, Aguinaldo. 



THE ISSUES OF THE CAMPAIGN 111 

Mr. Bryan's three propositions for the settlement of the 
Philippine situation are these : — 

First. To establish a stable government there. 

Second. To give an independent government to the 
Filipinos. 

Third. To protect that independent government from 
outside interference. 

The first proposition to establish a stable form of govern- 
ment is exactly what the present Administration is doing. 
The second proposition is at present impossible for reasons 
which we have endeavored to state. But for the sake of 
argument, let us suppose that, in accordance with Mr. 
Bryan's second proposition, some sort of so-called self- 
government is established among these semi-civilized sav- 
ages, and let us consider his third proposition. 

This proposition is a sort of Asiatic Monroe Doctrine 
which shall apply as far as the United States is concerned; 
but shall not involve equal rights on the part of foreign 
powers. He forgets that, as a mere interloper without 
the sovereignty she now possesses in the Philippines, the 
United States would occupy about the same unhappy posi- 
tion in the Far East as a European power would occupy in 
attempting to interfere, contrary to the Monroe Doctrine, 
in islands in the American seas. As some one has well said, 
"The Monroe Doctrine is a law of national self-defense." 
It is not an arbitrary doctrine made for purposes of extend- 
ing national responsibilities without incurring national 
benefits. What an absurdity it would be for the United 
States, possessing no right, through sovereignty, to inter- 
fere with the foreign or domestic policy of the so-called 
independent Filipinos, to assume to establish a protector- 
ate over them, with just as large an army necessary to its 
maintenance as if the United States controlled the islands, 
and to mix in every quarrel with foreign powers which this 



112 ESSAYS AND SPEECHES 

inexperienced collection of natives would inevitably stir 
up. 

If these natives should declare war against some foreign 
power, would not that mean that the United States must 
interfere, and would not that interference either mean war 
on its part with a foreign power, or, if it decided ad- 
versely to their position, with the Filipinos themselves? 
The minute we commence to deal with conditions and not 
with theories, we must see that if the interference of the 
United States is necessary to preserve peace and liberty in 
the islands, the rights of the United States in the islands 
must be recognized there and abroad. Before we make 
promises to the Filipinos, let us get better acquainted with 
the Malay race, and then further discuss their capacity for 
self-government . 

As opposed to this vague theoretical and superficial plan 
of Democracy, let us consider the plan of the President. 

You may read every utterance and examine every act of 
William McKinley in connection with the whole Spanish 
and Philippine War, and you will not find one inconsist- 
ent with the dictates of the most enlightened conscience. 
Every public order and proclamation relating to forms of 
government of President McKinley to the Filipinos guar- 
antees to them protection in their inalienable rights to life, 
liberty, and the pursuit of happiness, and as full a measure 
of personal independence as is enjoyed by any American 
citizen. 

In so far as it can be done without endangering the 
stability of the Government there, and therefore endan- 
gering the liberties of the inhabitants, the United States 
proposes and has always proposed to give the Filipinos 
themselves every opportunity to participate in the Gov- 
ernment up to the limit of their capacity. In his letter of 
acceptance the President makes this very clear. With the 



THE ISSUES OF THE CAMPAIGN 113 

sovereignty of the United States established, the Filipino 
and the resident foreigner alike are guaranteed protection 
to life, liberty, and property, and equal justice under a law 
impartially and honestly administered. The strong hand 
of the United States, compelling justice, punishing the 
criminals and the oppressors, helping the poor, protecting 
life and property, and guaranteeing equality to all under 
the law, will bring to these beautiful islands the blessings 
of peace, prosperity, and happiness. 

The constitutional right of the United States to do this 
is explicit, for its Constitution expressly states that "Con- 
gress shall have power to dispose of and make all needful 
rules and regulations respecting the territory belonging to 
the United States." 

We may look at the question as we will, from the stand- 
point of national interest, or from the standpoint of na- 
tional duty, we must keep our sovereignty in these islands, 
and our party stands for the retention of this sovereignty. 
It believes that our sovereignty will secure for natives and 
foreigners therein resident liberty and protection to life 
and property, while without that sovereignty the islands 
will be seized for a foreign nation or by a native oligarchy 
of a cruelty and corruption which would rival that before 
maintained by Spain. It believes that the retention of our 
sovereignty in these islands means the increase of their 
trade with the United States, and through the commercial 
foothold obtained in them the securing to the labor and 
capital of the United States their fair share of the enor- 
mous trade of the Empire of China, the greater part of 
which, although naturally belonging to us, now goes to 
other nations. 

Our party is not unmindful of the fact that the recent 
magnificent rescue of our Minister and citizens in Peking 
by our troops was made possible by our foothold in the 



114 ESSAYS AND SPEECHES 

Philippines, which enabled us to place American troops 
where American lives and interests were endangered. Was 
not that rescue and the circumstances which surrounded it 
significant of the great power as a factor in the world's 
progress which the Republic now possesses, and do they 
not suggest added reasons why this nation shall not in de- 
fiance of duty surrender a power which can so effectively 
be used for humanity's sake? 

In looking at these people, we have no right to consider 
the leaders alone, but must think of the millions of poor 
and ignorant natives whose only experience with govern- 
ment has been with Spanish tyranny. We cannot abandon 
these natives to the dictatorship of those whose only school 
of government has been that of Spain. 

How much consideration to the inherent rights of for- 
eigners in Manila, whom we are bound by treaty obliga- 
tions to protect, would these savage leaders give who only 
turned to war upon their liberators when they were discov- 
ered in a treacherous plot to massacre at night our soldiers 
and the foreigners in Manila? 

If the Democratic Party is so solicitous that there shall 
not be any government without the full and free consent 
of the governed, I would ask them to agree to count the bal- 
lot of the black men in the South before they offer it to the 
semi-civilized savages of the Philippines. 

And I say to you that if these semi-civilized peoples are 
to be dealt with justly, humanely, and tenderly, and lifted 
up into a better and nobler civilization, they will fare bet- 
ter with the party of Abraham Lincoln and William Mc- 
Kinley than with the party of Benjamin R. Tillman, of 
South Carolina. 

My friends, the Republican Party in this campaign, as 
in the past, stands for national duty and for national 
progress and for national prosperity. It stands unitedly 



THE ISSUES OF THE CAMPAIGN 115 

behind the President in his foreign policy. It recognizes 
the masterful way in which he has dealt with great issues 
in the fear of God and in the highest interest of his fellow 
citizens. In this campaign our people are for the first time, 
in November, to register their decision upon the great 
principles at stake in the war in which our nation has been 
engaged. What our soldiers fought for in the Philippines 
our party fights for now, and the defeat of our arms on the 
field of battle could have been no more disastrous to those 
principles than our defeat at the polls in November. This 
is no time for apathy, and no time to discuss non-essentials. 
The President, who was reluctant to have this nation enter 
upon the Spanish War until he knew it was a righteous war, 
is now most aggressive in his demand that the responsibil- 
ities engendered by that war shall be met as bravely and 
honorably as was the war itself. But the very men who 
were the most impatient to get this nation into war are 
now the most impatient to have it back out. 

This great Republic stands at the parting of the ways. 
It will not take the wrong one. It will not turn its back 
upon duty. It has come to this nation to enter broader 
fields and to raise to higher and happier life millions of peo- 
ple cast under its protection by an unavoidable war. It is 
true this nation is bearing great responsibilities; but it can- 
not avoid them. There is no responsibility so great as that 
involved in shunning a responsibility which it is our duty 
to meet. 

As this nation has met its duties in the past, let us as 
individuals meet ours at the polls in November; and let us 
stand unitedly behind the principles and policies of the 
present Administration. 



THE QUESTION OF THE HOUR: BUSINESS 
PROSPECTS 

(Address before the Chicago Real Estate Board, October 23, 191Jf. 
Stenographically reported by G. Russel Leonard) 

Mr. President, and Gentlemen of the Chicago Real Estate 
Board: — 

We meet under unprecedented conditions, not only 
here, but all over the world. The problems which we have 
to confront are new problems. The factors which will 
determine business in the United States in the future are 
new factors. The old landmarks of business, by which to 
a certain extent we could guide ourselves and our plans, 
have been swept away. We are in the midst of what is al- 
most a world-wide war. A large portion of the population 
of the world has reverted to barbarism. 

Think of what one on the planet Mars would say, who 
for the last forty years had looked down upon the earth, 
who could not have seen the boundary lines — because 
they are not physical — between different peoples and 
different governments, and had seen that one people of 
Europe, that one mass of humanity, working, toiling, striv- 
ing for forty years to build up wealth which would give 
them freedom, to a certain extent, from the necessity of 
manual toil and the opportunity to build up the sciences 
and the humane arts, and then at the same time have seen 
them with equal energy, under the theory that it was neces- 
sary for the preservation of this wealth, building up great 
engines of destruction which, at a given moment, they 
turned against accumulated wealth and against each other, 
reverting in a day not only to where they started forty 



THE QUESTION OF THE HOUR 117 

years before, but reverting back ten thousand years into 
primeval barbarism. [Applause.] 

We confront, as I say, in a situation such as this, new 
conditions, new problems. One cannot make the conven- 
tional speech. The conventional phrases are no longer 
appropriate. If a man believes there is going to be pros- 
perity, he must give a reason, and that is what I am going 
to do to the best of my ability — to give my reasons why 
I believe the United States is about to enter upon one of 
its greatest eras of prosperity. 

In the first place, a natural reaction to prosperity was 
due in this country at the time of the outbreak of the 
European war. We had passed through, in 1913, one of 
the most drastic liquidations of credit in the financial his- 
tory of the United States. The panic of 1893, with which 
those of us who are older were bitterly acquainted, was 
looked upon as one of the most elemental panics, and it 
resulted in a depression of business from which we did not 
begin to recover for four or five years. And yet, do you 
know that in the panic of 1893, the reduction in deposits 
— the deposits representing purchasing power — of all the 
national banks of the United States was only $4£2,- 
000,000 as compared with the reduction in the deposits 
of all the national banks of the United States in 1913, of 
$426,000,000? 

The reason why that unprecedented liquidation of de- 
posit credits last year in the United States did not bring 
us into the same chaos of business, the same prostration 
of industry, that it did in 1893, was because of the improve- 
ment in banking conditions and the facility with which 
bankers have come to handle such crises as that. And so 
it was that, while in 1893, bank loans were contracted to 
the extent of $313,000,000, in 1913, instead of contracting 
loans to this enormous extent, — in other words, instead 



118 ESSAYS AND SPEECHES 

of going out and demanding that the solvent business of 
the United States give up its life-blood to the banks, — 
the national banks actually increased their loans to the 
extent of $40,000,000. The bankers had learned how to 
protect the great superstructure of credit which is built 
up under the normal and ordinary operations of banking, 
and which constitutes the foundation for the greater part 
of the circulating medium of the country, for ninety-five 
per cent of our business is transacted by checks and drafts 
drawn against deposits in solvent banks. All economists, 
John Stuart Mill in particular, recognize the fact that 
these deposits are purchasing power; that credit is pur- 
chasing power; that in the effect upon purchases, under the 
law of supply and demand, the use of checks and drafts, or 
the use of any credits as a purchasing power, has just as 
much of an economic effect in fixing the range of prices as 
if the physical money of the Government were used. 

And so, sixty days ago, what was it that the bankers of 
this city and the bankers of the United States confronted? 
They were confronted with a draft upon them for physical 
currency which was necessary in the banks as a founda- 
tion for the superstructure of these deposit credits in terms 
of which you do your business, and all do business in the 
United States; for, as I said before, of all business ninety- 
five per cent is transacted in this particular form of bank- 
credit currency. They perhaps violated the Sherman 
Anti-Trust Law. I hope not. I do not know. But they 
protected that superstructure of credit, not any more for 
themselves than for the business community, for industry 
and for commerce in the United States. They devised the 
clearing-house system. I have explained, I think, over at 
the Chamber of Commerce just how the certificate system 
protects the cash in a community and keeps it under the 
bank deposits. When a national bank in a central reserve 



THE QUESTION OF THE HOUR 119 

city is down to its reserve, in other words, has only twenty- 
five per cent under our present law of physical cash on 
hand, as against its deposits, for every one dollar in cur- 
rency that is taken out of those reserves, in order to restore 
the relation between reserves and deposits, three dollars of 
credits must be canceled in the form of loans against four 
dollars of deposits. The bank calls its loans and they are 
paid by check, not by physical cash, as a rule. That is why 
in the panic of 1893 our business went down in chaos. The 
preservation of the existence of cash reserves in the banks 
was absolutely necessary to the preservation of the chance 
to have prosperity in the future. So we provided for the 
clearing-house certificate system. 

To the minds of most of us — to my mind before I went 
through the panic of 1907 — the clearing-house certificate 
simply was a convenience to a bank in paying a debit at the 
clearing-house in an I O U instead of in currency, and to 
that extent only, protected the currency in the bank. But 
it had another effect. It prevented the buying of outside 
business, the competitive buying of outside business by 
one bank from another by shipping currency out of town. 

Let me illustrate that. If a banker at Peoria had $100,- 

000 on deposit with me and wanted the physical cash, I 
might argue with him all I pleased that here was an emer- 
gency which was national; that he had not deposited cur- 
rency, but had deposited credits; that he should stand with 
me and endeavor to protect the community as well as the 
banking system from disaster and chaos and tell his deposi- 
tors to wait, as I was telling my people to wait until credit 
conditions could be restored, and confidence could be re- 
stored, and the panic could be stopped. But he would not 
listen. He would go over, we will say, to one of my rivals 
in banking and say, "Mr. Dawes won't give me currency. 

1 have $100,000 deposited in his bank. If you will give me 



120 ESSAYS AND SPEECHES 

$50,000 in currency, I will transfer to you the whole de- 
posit." The banker would take it and put in the Peoria 
banker's checks upon me for $100,000, and if we were not 
upon a clearing-house basis I would have to settle in the 
clearings for that check for $100,000 currency. But if we 
were on a clearing-house certificate basis and one of the 
other banks would take the deposit and pay the $50,000 
in currency to the Peoria banker and the check of the 
Peorian for $100,000 would come in on me through the 
clearings, I would pay it in a clearing-house certificate 
instead of in cash and my rival would be out the $50,000 
in currency. That is one way the clearing-house system 
protects the city from a drain in cash. 

And it is exactly the same condition which the bankers 
of New York confronted. Their reserves were below the 
legal limit. They are now — this last week — about at the 
normal figure, so confidence is reviving. Unprecedented 
demands were made upon them for the payment of that 
which constituted the reserve foundation of the deposit 
credits of the New York banks, and if they had shipped 
gold, if they had paid their debts in gold instead of paying 
them in credits, as they chiefly do in the normal condition 
of things, the whole credit superstructure of the United 
States practically would have been in ruins. It was an 
emergency — it was war — and they did not ship gold. 
They said to their foreign creditors: "Wait. It is as impor- 
tant to you as it is to us that this great credit structure in 
the United States be preserved." And they were fighting 
your battle and my battle. They were fighting for the pro- 
tection, for the preservation of purchasing power in the 
United States, and, thank Heaven, they have protected 
and preserved it, and it is the best reason to-day why we 
can hope for approaching prosperity in the United States ; 
for when people need things, they now have the credit to 



THE QUESTION OF THE HOUR 121 

buy them with, and if people live, they need things and 
want them and will buy them. [Applause.] 

They protected that superstructure of credits — the 
New York banks. And now they are paying those foreign 
debts by grain and other shipments. Conditions being 
more normal, they are beginning to pay them as best they 
can in gold. But they had to do exactly what we did here 
sixty days ago and in 1907 — suspend for a time cash 
payments. 

I regard as a great calamity to the country what the 
bankers of Chicago looked upon at that time as something 
very creditable, that is, that they did not in 1893 go upon 
a clearing-house basis, because they happened to have a 
temporary relief of an inflow of physical cash from the 
World's Fair, and thus left practically without the protec- 
tion of their example the banks of the entire West, and that 
tremendous and widespread contraction of deposits against 
loans went on in the West which brought the great depres- 
sion and great loss and the great suffering of 1893 and the 
following years. The bankers of New York did not im- 
mediately pay out their cash which was demanded by 
Europe, but they are now paying their debts. 

Now, in my judgment what we have recently gone 
through will result in an international clearing-house sys- 
tem some time in the future, by which, by paying the 
proper penalty as we do in the shape of seven per cent 
interest on our local clearing-house certificates, some way 
can be arranged for a nation to temporarily avoid the 
transfer and the transportation of physical gold, with all 
the dangers which are attendant to the credit system of 
the different countries when that shipment assumes an 
unusual volume. 

But — this my first point and my longest point — pur- 
chasing power has been preserved in the United States. 



VW, ESSAYS AND SPEECHES 

There is an economic value to peace. If an industrious 
man owns a farm next to another man who fights, or who 
devotes himself to something other than caring for his 
farm, under economic laws and under divine laws the idle- 
ness of the latter is not allowed to penalize the man who 
works — who is at peace. I can have no intellectual sym- 
pathy with the economists who say that in this great de- 
struction of wealth in the European world we must largely 
share, and must be greatly hurt. The Lord has put us here 
to work out our civilization under the laws of the survival 
of the fittest. The man who is peaceful and the man who is 
industrious and capable generally profits at the expense of 
those who, either through no fault of their own or through 
fault of their own, give up industry and turn their atten- 
tion from farming and forging into fighting. There is no 
reason in sound political economy, so far as I am able to 
judge, for believing that this great disaster which we so 
deplore and which is crushing our brothers in Europe will 
result in economic disaster to us. For a nation is like the 
individual, subject to the same laws, and offered by his 
Creator the same inducements for sobriety and industry. 

The first impetus that is coming to us in this country at 
this time, the first step in what I believe to be prosperity, 
now that we have the purchasing power protected in the 
United States which must be its basis, — for prosperity is 
only another name for activity in exchanges, — is the ac- 
tivity in exchanges which has started in connection with 
the food products of the country. 

For the week ending October 8, as compared with the 
same week last year, there were forty-four cities which 
actually showed a gain in their bank clearings, which are 
the best measure of the evidence of activity in exchanges. 
There were sixty-six cities that showed a decrease, but 
forty-four showed an actual increase, and those cities were 



THE QUESTION OF THE HOUR 123 

largely situated in the Middle West. The agricultural 
Middle West is practically in a condition of prosperity 
to-day. Real estate — the great foundation of all value — 
is turning its dividends into the hands of the farmer. We 
have a great crop. We have high prices. Our wheat ex- 
ports to-day are twenty-five per cent greater than they 
were a year ago. 

There is a feeling of optimism in the Middle West. There 
is an ability to purchase on the part of the Middle West, 
just as there is on the part of the people in the East who 
yet lack confidence. But with that increasing activity of 
exchanges in the Middle West will come the purchases on 
the part of the Middle West from the East. When business 
activity starts, after such a great blow as the interjection of 
a foreign war, in its natural and peaceful and orderly 
conduct, the impetus comes first in those businesses which 
produce goods for almost immediate consumption; but it 
cannot come thus to agriculture — to the men who sell meat, 
to the men who sell fish, to the men who raise farm prod- 
ucts of all kinds; it cannot come to them in this country, 
without being reflected before a great time in almost every 
line of business. They talk about our foreign trade. We 
ordinarily devote, in our forecasting of prosperity or ad- 
versity, almost one quarter of the time which we consume 
in giving our learned opinions to comment on the state of 
our foreign trade, and yet the entire foreign trade of the 
United States is only about one per cent of our total domes- 
tic and foreign trade, and I make this assertion that, so 
far as domestic prosperity is concerned, our foreign trade 
is practically a negligible quantity. [Applause.] 

If our foreign trade falls off thirty-three per cent, — this 
may not be orthodox, but it is true, — if our foreign trade 
falls off thirty-three per cent, it represents only one third 
of one per cent of our total trade; and what fluctuation to 



124 ESSAYS AND SPEECHES 

the extent of one third of one per cent can furnish those 
conditions which justify us in looking upon them as deter- 
mining prosperity in the United States of America? 

We are independent. We are commercially independent. 
We are industrially independent. We do not need the 
world as the world needs us. And this great war which has 
come upon Europe at this time will put an additional 
premium upon the prosperity of the United States, and 
eventually will not in any material way reduce or lessen it, 
in my judgment. [Applause.] 

While I have made one or two business addresses during 
this fall, I really retired from speaking a year ago last 
March, because — not supposing that the public would 
have any interest in what I said — I made an ex tempore 
speech — as this is — before the Electrical Club, and some 
young man from one of the papers undertook to translate, 
in language which he thought better than mine, my real 
purposes [laughter], and among other things he stated that 
I said "real estate was a gamble." And he also said that 
my friends on the Board of Trade were guilty of this and 
that offense. And to my great surprise the young man made 
such epigrammatic and forceful statements — of absurdities 
— that in the papers the next morning they came out with 
double stars. [Laughter.] 

In the real-estate department of our bank some of those 
to whom we had sold mortgages came in and said, "What 
is the matter with your president? Please take back these 
mortgages." The president of the Chicago Real Estate 
Board, in a very dignified and very able way, called atten- 
tion to my errors. The Chicago Board of Trade appointed 
a committee [laughter], who wanted to know why it was, 
in view of our harmonious relations as bankers with them 
as individuals, that I had indulged in such reflections. I 
denied it until the reports of the speech began to come in 



THE QUESTION OF THE HOUR 125 

stereotyped in the country papers, and then I fled to Cali- 
fornia and made no more public speeches, and until about 
sixty days ago resolved that I never would. [Laughter.] 

But I want to tell you, as I come back, gentlemen, your 
guest (therefore probably forgiven for that of which I was 
never guilty), that I never said it. [Applause.] 

I have ten minutes left and that much ought to be saved 
out of any time in days like these to say something along 
patriotic lines. There is a patriotism, my friends, in a pride 
of peace, and I never felt prouder of my country than at 
this time, and I never felt prouder of our President, than 
I do at this time, who, despite the clamor of the dema- 
gogues, despite the political advantage which might have 
come to him and his party, did and has done for the past 
year that which he believed to be right, and preserved and 
protected us from a war with Mexico. 

We are all of us — or should be to some extent — poli- 
ticians, but we are first American citizens, and I for one, 
even upon the eve of a political conflict, would not with- 
hold my praise from that great and anxious and quiet man 
who has rendered us this great service. [Applause.] 

We have a great country. I like to tell — because I have 
found out that people like to hear it — I like to tell how I 
was once upon the flagship New York as the American 
fleet came from the battle of Santiago — up the Hudson 
River, after their long absence in that Santiago campaign. 
I had gone down as a guest with the Cabinet to those war- 
vessels as they lay in their gray paint in the darkness of 
the early morning down the bay. As we later steamed up 
into the Hudson River, it seemed as if there were a million 
people upon the shore. All New York seemed to be out. 
The excursion boats were whistling; the artillery was firing 
salutes; upon the deck of every battleship the bands were 



126 ESSAYS AND SPEECHES 

playing the national anthem; and on our deck I saw one 
young captain of marines — I shall never forget — the 
tears running down his face, walking up and down, saying, 
"This is my country! this is my country! this is my coun- 
try ! " And that same day at noon I saw old Secretary Wil- 
son walking alone on the quarterdeck, and I said, "Mr. 
Secretary, they are serving luncheon below, and you had 
better go down." Secretary Wilson is a typical American 
citizen — from Iowa; a farmer — dignified — with the 
majesty of naturalness, without affectation; and he said to 
me, "I don't make it a rule to go where I am not asked." 
"But," I replied, "nobody will regret the oversight more 
than the officers of the ship; you should go down. You 
have had nothing to eat since four this morning." He said, 
"My boy, I will tell you" (I was younger then), "thirty- 
five years ago I came up this same river with my Scotch 
father and mother, in the steerage of a little ship, and now 
I come up this same river on this great warship, a member 
of the Cabinet of the President of the United States. I 
want to walk here and think about it. I can get along 
without lunch to-day." [Applause.] 

Think of what this country has done for men like Wilson, 
for men like us, for any man who will do his duty, for any 
man who will do his work as best he can. It is the best 
country in the world. I shall never forget my sensations 
on my only trip to Europe. I had been over there for 
thirty days, traveling about one hundred and fifty miles a 
day and being put up in the worst rooms in the hotels, un- 
able to speak any language except my own, buffeted, sick, 
sore, tired. They told me on the returning ship that last 
day out that if I stayed up until two in the morning I might 
see the Fire Island Lighthouse. And so on that dark, cold 
morning at two o'clock, I watched with three or four others 
(I do not think there were over three or four others among 



THE QUESTION OF THE HOUR 127 

the thousand on the ship that were so homesick as I), until 
off through the darkness I saw that little pin-prick of light 
lift itself up above the level of the sea. And when I saw it, 
and realized what was behind it, it seemed for the minute 
as if I would not trade three square miles of it for the whole 
continent of Europe ! [Applause.] 

And so, my friends, I end this speech in the words of 
another : — 

"My country! May she be always right! But, right or 
wrong, my country!" [Prolonged applause.] 



THE DANGERS OF THE FEDERAL 
RESERVE LAW 

IN ITS PRESENT FORM AND HOW IT SHOULD BE 
AMENDED TO AVOID THEM 

(Address before the Union League Club, of Chicago, Saturday, 
January 9, 1915) 

Gentlemen: — 

My subject was announced, as the chairman has said, 
"The Federal Reserve Bank: Its Benefits, Its Dangers, 
and Its Relation to the Future Business of the Country," 
but my address will be for the most part upon "The Dan- 
gers of the Federal Reserve Law in its Present Form, and 
how it should be amended to avoid them"; for what has 
happened in our community within the last two weeks in 
connection with criticism of the management of the local 
federal reserve bank is but the beginning of a controversy 
which, in time to come, will sweep over this country and 
which, if not foreseen by change in legislation, may (as 
twice before in our history) bring us into commercial chaos 
and financial ruin. 

The ever live question in a republic is the relation of the 
centralization of power to the diffusion of power. Under- 
neath every question of politics in a republic, underneath 
every question of economics in its public aspect, is that 
difference among our people between the policy of the con- 
centration of power and the policy of the distribution of 
power among a large number of competing units. And if 
in the Federal Reserve Bank Act we find certain principles 
which have been overlooked in their public relation, which 
are certain to bring upon sensitive institutions (for a bank 
is a sensitive institution) this old, old controversy, it is time 



THE FEDERAL RESERVE LAW 129 

to point out these principles; it is time to point out the 
dangers, before the credits of the banks have gone into gen- 
eral business, before the whole commercial edifice depends 
upon them as a foundation, and before the time when polit- 
ical attacks upon the Federal Reserve Law and the banks 
organized under it may result in a contraction of credits 
from which we suffered twice before, in the case of the First 
and Second Banks of the United States, and in the latter 
instance brought us into the chaos and the panic and ruin 
of 1837. 

I wish to show why in my opinion the Federal Reserve 
Law, as it is at the present time upon our statute books, 
will inevitably, in the course of a few years, bring our peo- 
ple face to face with the controversy through which this 
country went in 1837, when Andrew Jackson, at the head 
of the radicals, supported by the independent state banks, 
attacked the United States Bank — a controversy which 
resulted in the destruction of the bank and of the commer- 
cial prosperity of the United States at that time. 

The federal reserve banks are great credit-creating de- 
vices designed to use as a foundation of credits money of 
the United States Government, and money belonging to 
other banks already in use by these other banks as a foun- 
dation of existing credits. They were designed to relieve us 
from an inelasticity, not a dearth, of currency. Whatever 
may be their present impression, the people eventually will 
never consider the federal reserve banks as "banks for 
bankers," but as banks to be operated primarily, as well as 
secondarily, in the public interest and not solely in the 
interests of the national banks of the United States. This 
will result, not only from the fact that the cooperation of 
the United States Government is essential to make the 
federal reserve banks fully effective in times of emergency, 
but because to exist and still preserve a reasonable capacity 



130 ESSAYS AND SPEECHES 

for public usefulness in times of emergency, the federal 
reserve banks must loan chiefly in the open market in com- 
petition with other banks. This results from the fact that 
we have ample currency in the United States except at 
times of special demand, when the crops are to be moved, 
or in times of financial panic. Under the Aldrich Bill, the 
immediate retirement of our $700,000,000 national bank 
note circulation, secured by government bonds, was pro- 
vided for, which would have made a vacuum in existing 
circulation which the Central Reserve Association could 
fill by loans to member banks. 

The Federal Reserve Law, however, makes no material 
reduction in the outstanding bond-secured national bank 
note circulation, since it provides for the retirement of not 
to exceed $20,000,000 per year. The federal reserve banks, 
therefore, will be forced into the open market for loans not 
only by the general demand of the people, but as a matter 
of business necessity. Over a year ago I pointed out that in 
normal business times banks will not pay a higher rate, as 
a rule, to borrow money from federal reserve banks than 
they now pay in open competition for the money of the 
depositing public; in other words, about three to four per 
cent for time money and two to three per cent for demand 
money. This is the reason why so few federal reserve notes 
have been thus far issued. If the federal reserve banks 
should loan their money to the member banks at these low 
rates in normal times, they would employ so much of their 
resources to pay their expenses and dividends as to impair 
their usefulness in times of emergency. The higher the rate 
which they receive upon their loans, the less will their cred- 
its have to be expanded in normal times and the greater 
will be their note-issuing capacity in times of emergency. 
They can make these open-market loans under one of the 
least discussed and yet one of the most important provi- 



THE FEDERAL RESERVE LAW 131 

sions of the Federal Reserve Law, which authorizes the 
purchase of domestic bills of exchange. But the law should 
be amended to clearly define powers which, while now ex- 
isting under the law, require in order to be exercised a 
change in the usual form in which credit is now granted. 
This brings me, then, to my first point against the law 
in its present form, that it provides for a dual trusteeship 
and for the control of federal reserve banks by bankers 
whose institutions will be in competition with the federal 
reserve banks in the open loan market. And let me say 
here, in connection with this local controversy which has 
arisen, that it is not necessary for me, in this presence or in 
any other, to defend the competency or ability or the hon- 
esty of the two leading bankers of this city, now members 
of the board of directors of the federal reserve bank of the 
city of Chicago. [Applause.] As a member of the board of 
directors and executive committee of the People's Trust & 
Savings Bank of Chicago, and knowing his ability and com- 
petency, I happen to be the man who first suggested Mr. 
Earle M. Reynolds for its president, upon Mr. Bosworth's 
resignation, and I seem to have involved George M. Rey- 
nolds in some criticism by it. It is hardly worth while, be- 
fore such an audience, to discuss such things as that, except 
as they are related to the great coming controversy in which 
the impossible principle of dual trusteeship provided for by 
the Federal Reserve Law will eventually involve all of the 
federal reserve banks. This first controversy has arisen 
upon apparently unessential things; but wait until all over 
this country these banks commence their operations and 
listen to the clamor of the demagogue, that the business of 
the federal reserve banks is being repressed in order to pro- 
tect the banks of those men which are in competition with 
them — that they are not being used as agents of the pub- 
lic or in the public interest, but in the interests of the na- 



132 ESSAYS AND SPEECHES 

tional banks of the United States which seek to use them 
and the money of the United States Government deposited 
in them. I only mention this local controversy, which is not 
worthy to be dignified by detailed discussion, as indicating 
what, in a few years, when the credits of the federal re- 
serve banks are expanded, will, unless the law be amended, 
be an issue upon every political stump of the country in a 
great campaign, when the federal reserve banks, as did the 
Second Bank of the United States, will fight for their con- 
tinued existence and for the maintenance of the founda- 
tions of general credit. 

And now, I come to a very important part of this argu- 
ment — the future relation of the United States Govern- 
ment, through the United States Treasury, to the federal 
reserve banks and the political and business consequences 
which will arise because of it. I want to make important in 
your minds the relation of the Secretary of the Treasury — 
the Government — to the federal reserve banks, because 
it is through that relationship chiefly that the banking 
system of the United States from now on will become a 
subject of political controversy unless the law is amended. 
The note-issuing capacity of the twelve federal reserve 
banks of the United States, based upon that provision of 
the law which allows them to issue notes with a 40 per cent 
gold reserve, after maintaining a 35 per cent lawful money 
reserve on their deposits, is $427,225,000. Bear in mind 
that these figures assume that the full 40 per cent gold 
reserve is maintained. Through the power of the Federal 
Reserve Board to suspend reserve requirements, the note- 
issuing capacity of these banks can be much increased, 
but I am now considering the banks as operating in nor- 
mal times. Their expenses, — roughly estimated, but near 
enough, I think, for the purpose of argument, — dividend 
requirements, and surplus requirements will be about 



THE FEDERAL RESERVE LAW 133 

$4,500,000 per year. To provide this sum they can loan 
in the open market $100,000,000 at 4j^ per cent, or to the 
member banks $180,000,000 at, say, 23/£ per cent. In the 
first case they would have left a note-issuing capacity of 
$327,000,000, and in the second case of $247,000,000. 

As the deposits of the federal reserve banks increase 
under the provisions of the law requiring reserve deposits 
from national banks, these amounts will be somewhat in- 
creased. The net deposits of the national banks of the 
United States — to protect against the fluctuations in 
which is the chief function of these banks — are $7,291,342,- 
479. In my judgment this approximate amount of notes 
would be inadequate to care for the situation in times of 
emergency, and the banks, to perform their functions, must 
encroach upon the 40 per cent gold reserve or rely upon the 
assistance of the government deposits, made by the Secre- 
tary of the Treasury. We must remember that the net de- 
posits of the state banks of the United States aggregate a 
sum greater than those of the national banks of the United 
States — that, in times of emergency, the inability of the 
state banks to meet the currency situation will greatly 
stimulate the demands upon the national banks. Even if 
the Secretary of the Treasury has not deposited govern- 
ment money with the federal reserve banks before, he cer- 
tainly would do it at any time that the federal reserve banks 
would otherwise have to encroach upon their 40 per cent 
gold reserve in issuing federal reserve notes. 

Do you realize that when the Secretary of the Treasury 
deposits the general fund holdings of the United States 
Treasury, as he is authorized in his unlimited discretion 
to do, in federal reserve banks, that he will have more 
money on deposit than all the national banks of the United 
States put together have on deposit with them at the pres- 
ent time? The deposits of the federal reserve banks now 



134 ESSAYS AND SPEECHES 

aggregate $249,786,000. The general fund holdings of the 
United States Treasury, which can be deposited and with- 
drawn by the Secretary of the Treasury at his sole and un- 
limited discretion, amount to $255,722,000. If he deposits 
that money, $99,700,000 of which is in gold, and these 
banks expand their business, and there should be put out 
by these banks, on the basis of these government deposits, 
several hundred millions of notes, tell me, after this credit 
has gone into circulation, who will be the great power in 
connection with the federal reserve banks — the Federal 
Reserve Board or the Secretary of the Treasury? Suppos- 
ing that in any state bank, with $40,000,000 of deposits, 
one depositor controlled $20,000,000 of them, what would 
be his influence upon any business engagements which the 
bank might consider? 

The Secretary of the Treasury is a political officeholder, 
the representative of a political administration. If, for the 
third time, the money of the United States Government 
goes into the business of the country through the federal 
reserve banks and the independent subtreasury system, 
which grew out of the last disastrous experience of this kind, 
is abolished, the position of power of the Secretary of the 
Treasury will be that exercised by R. B. Taney, the Secre- 
tary of the Treasury under Andrew Jackson. 

Before we consider what he might or might not do, let 
us consider for a moment the situation which, whenever 
the United States deposits have gone into business, he is 
not only likely but certain to confront. A great clamor will 
have arisen in the country against the control of the fed- 
eral reserve banks by competing bankers. A claim will be 
made, if the money of the federal reserve banks has been 
loaned to member banks, that if it had been loaned to the 
public general interest rates would be lower. If, on the 
other hand, these deposits had been loaned to the public by 



THE FEDERAL RESERVE LAW 135 

the federal reserve banks, a great clamor will be heard 
about the tremendous power exercised by those dominat- 
ing the banks, and opposition will arise from the independ- 
ent banks, both state and national, suffering from compe- 
tition in the loan market from funds taken from national 
banks without interest and from government deposits. A 
clamor will come from those unable to secure credit from 
the federal reserve banks, which would accommodate in 
normal times large institutions as distinguished from small 
institutions because the credit emissions of large institu- 
tions are better than those of small institutions, as a rule. 
A clamor will arise that these federal reserve banks, pos- 
sessing great power over credits and business conditions, 
are dictating terms under which general business can be 
transacted. 

Imagine the position of an Administration under such a 
situation. If it did not yield to it, it would go out of power 
and another would be put into power which would yield to 
it. Let us see what R. B. Taney said and let us see what he 
did. And if anybody sees anything inappropriate in this 
attitude taken by Taney, who afterwards became Chief 
Justice of the United States, as applied to the situation in 
which this country will be after the expansion of the credits 
of the federal reserve banks, let him say so: I am reading 
from the Financial Report of the Secretary of the Treasury 
of the United States for 1833: — 

It is a fixed principle of our political institutions to guard 
against the unnecessary accumulations of power over persons or 
property in any hands, and no hands are less worthy to be trusted 
with it than those of a money corporation. In the selection, there- 
fore, of the state banks as the fiscal agents of the Government — 

This is when he commenced to withdraw the government 
deposits, because of the political prejudice in this country 
against the power which must necessarily attach to semi- 



136 ESSAYS AND SPEECHES 

public banks if they are to perform the function for which 
they were created — 

In the selection, therefore, of the state banks [that is, as dis- 
tinguished from the Second Bank of the United States] as the fiscal 
agents of the Government, no disadvantages appear to have been 
incurred on the score of safety or convenience, or the general in- 
terests of the country, while much that is valuable will be gained 
by the change. I am, however, well aware of the vast power of 
the Bank of the United States and of its ability to bring distress 
and suffering on the country. . . . But I have not supposed that 
the course of the Government ought to be regulated by the fear 
of the power of the bank. If such a motive could be allowed to 
influence the legislation of Congress, or the action of the Execu- 
tive Department of the Government, there is an end to the sover- 
eignty of the people and the liberties of the country are at once 
surrendered at the feet of a moneyed corporation. They may now 
demand the possession of the public money, or the renewal of the 
charter; and if these objects are yielded to them from apprehen- 
sions of their power, or from the suffering which rapid curtail- 
ments on their part are inflicting on the community, what may 
they not next require? Will submission render such a corporation 
more forbearing in its course? What law may it not hereafter de- 
mand that it will not, if it pleases, be able to enforce by the same 
means? 

In that year, 1833, the Government of the United States 
had on deposit with the Second Bank of the United States 
less in proportion to the other deposits of the bank than the 
Secretary of the Treasury is now authorized to deposit in 
the federal reserve banks as compared with their present 
deposits. The Government then had on deposit with the 
Second Bank of the United States $6,512,000 while the pri- 
vate deposits of the bank were $9,868,000 — about fifty per 
cent more than the United States deposits. Three years 
later, the Secretary of the Treasury had completed his part 
of the war against the Second Bank of the United States. 
In March, 1836, the United States deposits were but $324,- 
000, and the private deposits had shrunk from $9,868,000 



THE FEDERAL RESERVE LAW 137 

to $3,390,000. The country was on its way to financial ruin. 
The great panic of 1837 which followed was brought about 
not alone by the war of Andrew Jackson and the radicals of 
the country, but by the war of the independent state banks 
which resented the competition of government money used 
by the Second Bank of the United States. I am not here to 
criticize Andrew Jackson. As a result of his war, while 
panic and disaster ensued for a time, there was laid the 
foundation of our great independent competing banking 
system composed of 27,000 units which have aided in build- 
ing up and developing the richest and most powerful busi- 
ness nation of the world. As a result of that war were laid 
the foundations of the independent subtreasury system, 
through which Uncle Sam, having had trouble in getting 
his money out of the banks where he had deposited it, from 
that time on kept the bulk of it in his own pocket. He had 
so much in his pocket in 1907 that in that panic he could 
spare enough to the banks of the country to tide them 
over. It is far from my intention to criticize Andrew Jack- 
son or the result of his war, but I do say that it is nothing 
short of folly for us to reestablish by law the conditions 
which brought about the Jacksonian war and the prostra- 
tion of business. It is not a popular thing to criticize a law 
from which everybody hopes good, but I say that the time 
to correct this law is before the credits of the federal re- 
serve banks have been expanded. 

Two great amendments, in addition to the one regarding 
open market operations, must be made to this law to re- 
move its menace to our future prosperity. The law must 
be amended to take the control of the federal reserve banks 
from their competitors. I realize that the law has compelled 
the national banks to buy the stock of the federal reserve 
banks — that they are the owners of them — that ordina- 
rily control should not be divorced from ownership — that 



138 ESSAYS AND SPEECHES 

it seems unjust from a banking standpoint that the bankers 
should not control them; but this is a case where the in- 
terests and attitude of the public are involved, and the 
banks in time will suffer from the retention of control more 
than from its elimination. I say this without any hesita- 
tion; I give warning that the people of this country will de- 
mand that these banks be operated independently, and not 
by trustees already charged with the duties of trusteeship 
over competing corporations. I am here to say that this 
principle of dual trusteeship established by this law is 
wrong, not only as a principle, but as a policy. Amend this 
law so as to keep the banks under the control of business 
men and not politicians, but take that control away from 
competitors. If you do not, you have laid the foundations 
of a political controversy in which the Andrew Jackson of 
the future, voicing the demand of the people, will again lay 
our commercial edifice in ruins. This can be avoided; and 
the stand of true patriotism is to make an effort to avoid 
it rather than to wait in an unreal and fancied security 
until danger has become disaster. There was a day one 
spring when Johnstown, Pennsylvania, was at peace and 
quiet in the feeling of security and the enjoyment of pros- 
perity. But was it out of danger, because the danger was 
not realized? There ought to be some man in the Senate of 
the United States, some man, somewhere, who, in connec- 
tion with this great danger which threatens the United 
States, could do as the man did who rode down before the 
flood from that crumbling Johnstown reservoir, and cried 
to that peaceful people the warning of the disaster which 
was coming. If the federal reserve banks are built upon 
the crumbling foundation of false principles, make no mis- 
take, their reservoir of credits will break in time, and our 
prosperity will be submerged. 

The second great amendment which must be made to 



THE FEDERAL RESERVE LAW 139 

the Federal Reserve Law is the curtailment of the im- 
mense power over government deposits in the banks which 
is now left to the sole and unlimited discretion of the Secre- 
tary of the Treasury. In the first place, he should not be 
permitted to place any of the general fund holdings of the 
Treasury in the federal reserve banks, to become a founda- 
tion of banking credits in normal times. He should not be 
allowed to deposit the general fund holdings of the Treasury 
in the federal reserve banks until the federal reserve banks 
have reached the limit of their possible expansion without 
government deposits, and then under such restrictions as 
would compel the banks to return the money after the 
crisis was past. The right to deposit and draw United 
States money in the federal reserve banks should not be 
left to one man's discretion, but should be subjected to 
proper checks against the possible wroDgful use of such 
vast power. But some one may say that our protection is 
the Federal Reserve Board. Is that permanent? Let the 
Federal Reserve Board be conservative as it is now, how 
long, against the pressure which will come from the people 
of the United States, can the Federal Reserve Board stand? 
We must make up our minds that these great credit-creat- 
ing devices are going to be used, and the power of any one 
Administration or any one Secretary of the Treasury to 
deposit and draw at his unlimited will and discretion what 
would amount at this time to one half of the total assets of 
the federal reserve banks must be prevented by amend- 
ment of the law. I care not who the man is, — I have 
confidence in Secretary McAdoo, — but that power should 
not be his, or that of any other one man. This law must for 
the first time be discussed with relation to the politics 
of the country. For the most part, the law is conformable 
to sound economics. It is capable of being made of great 
usefulness to our people, but in order to be so, it must be 



140 ESSAYS AND SPEECHES 

amended before your business and my business becomes 
adjusted to and dependent upon the existence of a large 
volume of credits, which, when these wrong principles in- 
volved in the law are justly attacked, and contraction sets 
in, will overwhelm us in the ruin which our forefathers 
went through seventy-eight years ago. The question of 
whether political appointees are put in charge of the bank, 
injurious as that would be, is subsidiary : the most impor- 
tant question is whether we can correct this law and prevent 
an attack upon these institutions upon whose proper han- 
dling of credits and currency our prosperity of the future 
depends. I thank you. [Applause.] 



ARGUMENT ON THE STEVENS MAXIMUM 
RATE BILL 

Before the Committee on Railroads of the Nebraska State Senate, 
February 25, 1891 

Gentlemen of the Committee: — 

The question of local freight rates is the most important 
one, in my judgment, which is before the Senate for con- 
sideration. In common with other citizens of Nebraska, I 
have taken an interest in this matter, and have had occa- 
sion to make some investigations, the results of which have 
a bearing upon the questions regarding the reasonableness of 
our present local rates. The argument of the railway com- 
panies against the reduction of local rates before this com- 
mittee, and before the State Board of Transportation, have 
been chiefly to the effect that the annual net earnings of 
the roads pay only a low rate of interest on actual cost, and 
accordingly a reduction of local rates at present would 
work a great injustice to the companies. Elaborate and 
tabulated statements have been presented from time to 
time in support of this proposition, notably in response to 
a resolution of the State Board of Transportation calling 
for statistics as to cost and earnings of roads, passed May 
12, 1890. These statistics seem to have satisfied the State 
Board of Transportation that our present local rates are 
low enough, and in their last Report (page 122) the Board 
says: — 

It is obvious that these figures, considered from the standpoint 
of the reasonableness of rates between shipper and carrier, as de- 
clared by the Board in the preamble to the resolutions directing 
this investigation, do not afford a basis for a reduction of the 
present maximum rates. 



142 ESSAYS AND SPEECHES 

. This finding, which I will now consider for a few minutes, 
is a very remarkable one. It is based upon the statements 
of cost of road and of annual earnings, averaged for three 
years, of the Burlington & Missouri River Railway in Ne- 
braska, which statement the Board in its Report gives in 
detail. In explanation, the Board says (page 119): — 

The Burlington system of lines in Nebraska extend over so 
wide a stretch of territory, reaching into those sections supplying 
a very small traffic as well as into sections supplying a very consid- 
erable traffic, that a tariff of rates adjusted for its lines in Ne- 
braska, on the basis declared just in the resolutions of the Board, 
would answer fully as well for all other lines in the State. 

After the detailed statement of cost and income, the 
Board says (page 121): — 

The average rate of income from all lines upon the cost of all 
lines (deducting from the total cost the pro-rata cost of the exten- 
sion of the Grand Island and Wyoming line from Alliance to the 
Northwest) is 5 9/100 per cent per annum (5.09). ' 

The average reader might possibly be convinced of the 
correctness of the holdings of the Board, but a very few 
statements which have been made by railroad officials them- 
selves will show the great injustice of their conclusions as 
based upon these quoted figures. As said before, the net in- 
come forming this 5.09 per cent is largely averaged for the 
three years ending December 31, 1889. Why is it averaged 
for three years? Simply because the year of the great strike 
on the Chicago, Burlington & Quincy Railway is thus in- 
cluded, and this reduces the average rate of earnings far be- 
low what they are at present and always have been under 
ordinary conditions. To prove this I append a statement 
made by Mr. G. W. Holdredge before this committee, show- 
ing the earnings of the Burlington & Missouri River Rail- 
way, west of the Missouri River, for the years 1883 to 1890 
inclusive. The unfairness of our State Board of Transpor- 



THE STEVENS MAXIMUM RATE BILL 143 

tation, in accepting as a basis for their finding the earnings 
averaged over 1887, 1888, and 1889, will at once be seen: — ■ 

Net earnings of 
v m the B. & M. By. 

rear west of the 

Missouri River 

1883 $4,237,890.11 

1884 4,364,780.49 

1885 4,778,212.27 

1886 4,693,614.16 

1887 4,319,066.97 

1888 (year of engineers' strike) 1,794,341.64 

1889 3,333,489.03 

1890 3,397,646.21 

In addition to this error, the State Board of Transporta- 
tion fails to take into account the proportion of bonded in- 
debtedness to the cost of the road, and the relation of the 
interest paid on bonds to the earnings derived from the pro- 
ceeds of the sale of bonds. This latter error aids the rail- 
way companies in successfully obscuring the true issues at 
stake. I will endeavor to show that the railroad compa- 
nies and the State Board of Transportation, by comparing 
only the cost of the road and the earnings, and assuming 
that the result settles the matter of a reduction of rates, 
ignore the very gist of the question. According to the 
statements of the railway officials, the proportion of local 
to through traffic is about ten per cent, and it will not be 
contended by any one conversant with the finances of the 
Burlington & Missouri River Railway in Nebraska that a 
reduction such as would be made by the Stevens Bill, 
should it become a law, would result in an inability of the 
road to meet the bond interest. 

The reduction in local rates affects the stockholder and 
not the bondholder, and the questions in the matter of 
local rates reduction become these : — 



144 ESSAYS AND SPEECHES 

What is the cost of the stock which will be affected by 
the reduction of local rates, and what is the ratio of stock 
earnings to stock cost? Will a reduction in local rates, such 
as asked for in the Stevens Bill, reduce these earnings to an 
unreasonably low amount? 

i This, and this alone, is the true basis for investigation 
and argument. To include covertly the bondholders and 
the stockholders in one class, as virtually has been done by 
the railroad officials and the State Board of Transportation, 
in this argument, is to beg the question. 

I will now discuss this matter, taking the Burlington & 
Missouri River Railway in Nebraska for the purpose of 
making the test, since it is the road selected from all the 
others for this purpose by the State Board of Transporta- 
tion in its last annual report. I will endeavor to show that 
the road of the Burlington & Missouri River Railway in 
Nebraska has cost the stockholders practically nothing. In 
other words, that the road has been built and equipped 
from the proceeds of the sale of first mortgage bonds, and 
the proceeds arising from the sales of the donated land 
grant, and municipal and county bonds voted to the road 
by Nebraska citizens. I will then consider what profits 
are annually accruing on the stock issued on this road. 

I now desire to show, as a step toward a conclusion, that 
during and from 1886 to the present year the Chicago, 
Burlington & Quincy Railroad Company has been building 
its new lines in Nebraska, Colorado, Wyoming, and Kan- 
sas from the proceeds of the sale of first mortgage bonds. 
Accordingly, I append a statement which I have collated 
from the last four annual reports of the board of directors 
of the Chicago, Burlington & Quincy Railroad Company 
to the stockholders : — 



THE STEVENS MAXIMUM RATE BILL 145 



Year 


Miles of new 
lines built 


Amount paid for 

construction and 

equipment 


Bonds issued dur- 
ing year, and sold 


Average rate 

of interest on 

bonds 

(per cent) 


1886 


389.988 
657.350 
223.894 
223.540 


$8,168,314.93 

15,131,542.95 

5,293,040.74 

3,925,746.58 


$2,870,200.00 
12,000,000.00 
8,901,280.84 
8,412,000.00 


4.9 


1887 


4 


1888 


4.2 


1889 


5 






Totals 


1,494.772 


$32,518,645.20 


$32,183,480.84 









The premiums derived from the sale of these bonds dur- 
ing these four years, together with a small sum resulting 
from discount on bonds purchased for sinking funds, 
amounting in all to $856,908, have, in the above statement, 
been subtracted from the cost of construction and equip- 
ment instead of being added in the bond column to the par 
value of the bonds — the result, so far as the relation of 
the cost of construction and equipment to income derived 
from the sale of bonds, being the same. However, mak- 
ing this change, we have the actual cost of construction 
and equipment, $33,375,553.20, and the income derived 
from the sale of bonds very approximately, $33,040,388.84. 
The only conclusion which can be drawn from these fig- 
ures is that the Chicago, Burlington & Quincy Railway, 
since and during 1886, has been building and equipping its 
new lines, in this and adjoining States, from the proceeds 
of the sale of bonds, drawing on an average a little over 
four per cent per annum. Taking the amount expended 
in the construction and equipment of new road in these 
last four years, which is $33,375,553.20, and dividing it 
by the number of miles of road constructed, which is 1,494.- 
772, we have the amount expended in these years, per mile 
of new road, for construction and equipment (including 
telegraph lines), which is $22,325. When we remember 
that of this 1,494.772 miles of new road over 1100 miles 
have been on "main lines," costing more in proportion, as 



146 ESSAYS AND SPEECHES 

is well known, than branch lines, we are led to believe that 
the value of Nebraska railways per mile, once assumed by 
Mr. Holdredge at $25,000, is certainly excessively high. 

Having shown that the new lines in this State in 1886 
and thereafter have been built from the proceeds of first 
mortgage bonds, let us again consider the land grant, and 
ascertain, if possible, the actual amount of cash the stock- 
holders of this railroad have invested for road in this State 
built prior to 1886. The road operated in Nebraska in 1887 
was 1781.77 miles. Subtracting from that sum the number 
of miles built in Nebraska in 1886, which is 370.69, we have 
as the length of the road in Nebraska just prior to 1886, 
1411 miles. In the printed report of the Board of Trans- 
portation for 1888 (page 414), the amount realized from 
the land grant of the Burlington & Missouri River Rail- 
way in Nebraska, above expenses and taxes, is given as 
$7,268,580.78, and the amount at present unpaid on out- 
standing contracts is $1,183,633.23, with 76,121.25 acres 
still unsold. Letting the acres unsold be an offset against 
the expense of selling them and of collecting the $1,183,- 
622.23, still outstanding, we will take $8,452,203.01 as a 
low estimate of the value of the land grants of the United 
States and the State of Nebraska. It is my belief that in 
this total the proceeds of the thirty thousand acres re- 
ceived with the Omaha & Southwestern Railway is not 
figured, but being unable to ascertain as to this I give the 
railroad company the benefit of the doubt. 

Dividing this $8,452,203.01, accruing to the stockholders 
from the land grant, by the 1411.77 miles of road, we see 
that for the road in Nebraska, built prior to 1886, the stock- 
holders must have received the sum of $5990 per mile from 
the land grant. 



THE STEVENS MAXIMUM RATE BILL 147 

The state records show that there have been voted mu- 
nicipal and county bonds to aid in the construction of the 
Burlington & Missouri River Railway in Nebraska, by 
Nebraska citizens, the sum of $2,372,800. 

Dividing this sum on the 1411.77 miles of road in the 
State December 31, 1885, we see that for the road in Ne- 
braska, built prior to 1886, the stockholders have received 
the sum of $1680 per mile. 

The large issue of consolidated bonds, and bonds se- 
cured by mortgage covering roads in other States as well 
as in Nebraska, make it extremely difficult to determine 
the exact amount of bonds per mile outstanding on Decem- 
ber 31, 1885. 

The written report of the Chicago, Burlington & Quincy 
Railway to the Board of Transportation for the year 
ending June 30, 1888, gives the total amount of bonds out- 
standing on that part of the road in Nebraska as $40,515,- 
830.82. The interest paid on these bonds is given as $2,064,- 
729.58, or 5.09 per cent per annum. The length of road 
in this State at the time said statement was made, as 
given in the same report, is 2120 miles. This gives a bonded 
indebtedness per mile of $19,111.54. 

By the table given before, in which I compare the pro- 
ceeds of bonds sold with cost of construction and equip- 
ment, I proved that since December 31, 1885, the west- 
ern road of the Chicago, Burlington & Quincy Railway, 
chiefly in Nebraska, had been built at a cost of $22,325 per 
mile, and that for that period the bond issue amounted to 
$32,183,480.84, which pro-rates at $21,541 per mile. From 
December 31, 1885, to June 30, 1888, according to the 
reports of the officers, 708 miles of new road were built 
(to wit: the difference between 2120 miles and 1411.77 
miles). To get the bonded indebtedness per mile on De- 



148 ESSAYS AND SPEECHES 

cember 31, 1885, all that is necessary is to multiply the 
$21,541 (the sum at which the new road was bonded) by the 
708 miles, which gives $15,251,028, and subtracting this 
sum from $40,515,830.82 we have the total bonded indebt- 
edness of the road on December 31, 1885, as near as can 
be calculated by outsiders. This result is $25,264,802.82. 

Then pro-rating this sum on the 1411.77 miles of road 
in this State at that time, we see that the bonded indebt- 
edness per mile on December 31, 1885, was $17,893. 

I regard this result of $17,893 as a fair estimate of the 
bonded indebtedness outstanding December 31, 1885, on 
the road in this State. This estimate is made from statis- 
tics given by the officers of the road to our State Board of 
Transportation. That it is a conservative estimate is indi- 
cated by the fact that on December 31, 1878, before the 
consolidation of the Burlington & Missouri River Railway 
in Nebraska with the Chicago, Burlington & Quincy Rail- 
way, when it is possible, of course, to exactly determine 
the bonded indebtedness per mile, the bonded indebted- 
ness on the 415 miles of road in Nebraska amounted to 
$10,933,300, or $26,345 per mile. The fact that in 1880 
the Chicago, Burlington & Quincy Railway Company, 
by consolidation, acquired with the 832 miles of Burling- 
ton & Missouri River Railway a bonded indebtedness of 
$18,701,200, or $22,477 per mile, is a further indication 
of the improbability that the bonded indebtedness to be 
charged the Burlington & Missouri River Railway in Ne- 
braska on December 31, 1885, is less than $17,893. 

First — I have now shown that the stockholders paid 
nothing on stock to build the 1,494.772 miles of road built 
during the period from December 31, 1885, to December 
31, 1889, but that said road was built from the proceeds of 
sale of first mortgage bonds at a cost (including equipment 
and telegraph lines) of $22,325 per mile. 



THE STEVENS MAXIMUM RATE BILL 149 

Second — I have shown that for the 1411.77 miles of 
road in the State December 31, 1885, the stockholders have 
received per mile : — 

(a) From land grants $5,990 

(b) From municipal and county bonds 1,680 

(c) From first mortgage bonds 17,893 

Total $25,563 

Now, let us consider the cost of construction and better- 
ments of the Burlington & Missouri River Railway in Ne- 
braska as given in its statements to the State Board of 
Transportation. (See Report of State Board of Transpor- 
tation for 1890, pages 119 to 122.) In these figures, which 
we give below, a portion at least of the equipment is in- 
cluded, as is also the cost of the shops at Plattsmouth, 
Lincoln, and Hastings. Whether all the other figures in- 
clude cost of equipment I cannot say. Our argument will 
be found complete whether they do or not. 

Burlington & Missouri River Railway in Nebraska 





Length of 
road 


Cost of construction 
and betterments 


Pacific Junction to Kearney, Kenesaw to 
Colorado state line, via Holdredge and 

McCook, main line 

(Includes equipment and shops at 

Plattsmouth, Lincoln and Hastings.) 

Nemaha City, Lincoln, Grand Island, to 

South Dakota state line 


391.61 

525.40 
180.60 

468.11 
241.68 
276.74 
115.21 


$14,896,535.50 
9,048,690.97 


Kansas state line, via Lincoln, to Columbus 
Salem, via Nemaha City, Tecumseh, Bea- 
trice, to Colorado state line 


5,610,100.82 
7,528,175.09 


Amboy, via Hastings, to Erickson 

Other divisions 


4,662,191.74 

4,788,688.77 


Omaha to Schuyler, via Ashland 


3,475,880.77 






Totals 


2199.35 


$50,010,263.66 



150 ESSAYS AND SPEECHES 

Dividing the cost of construction and betterments by 
the mileage, 2199.35, we have as cost of the construc- 
tion and betterments (and a large portion at least of the 
equipment) $22,742 per mile, according to railroad au- 
thority. 

Now, since the cost of the road since December 31, 1885, 
including equipment, has been $22,325 per mile, which 
was paid for from bond proceeds, and as I have shown that 
the roads have received $25,563 per mile for the road built 
prior to December 31, 1885, and have also shown that in 
their own statement to the Board of Transportation the 
officers of the Burlington & Missouri River Railway in 
Nebraska report the total cost of the Burlington & Missouri 
River Railway in Nebraska, including betterments and a 
portion of equipment, as only $22,742 per mile, I maintain 
that it is proved that the investment of stockholders in 
the Burlington & Missouri River Railway in this State is 
represented only by the value of the land grant and mu- 
nicipal bonds. In other words, the stockholders are earn- 
ing their dividends on the proceeds of Nebraska land 
donated them by the Government, and Nebraska county 
and city bonds donated them by the citizens. 

It will be noticed that there is a leeway in the above 
figures of nearly $3000 per mile of road prior to December 
31, 1885, which could be allowed the railroad company and 
still not impair the conclusion that the only investment of 
stockholders is represented by county and municipal bonds, 
and land grants. This certainly will provide for any equip- 
ment not included in the above figures, or other inaccura- 
cies. 

To clinch the argument, let us show the truth of this 
conclusion in another way: — 



THE STEVENS MAXIMUM RATE BILL 151 

Cost of construction, betterments, and 
portion of equipment as given by offi- 
cers of the Burlington & Missouri 
River Railway in Nebraska (see table 

given before) . $50,010,263.66 

The Burlington & Missouri River Rail- 
way in Nebraska has received as fol- 
lows: — 

Amount of first mortgage bonds. . . . 40,515,830.82 

Value of land grant- 8,452,203.01 

Value of municipal and county bonds 2,372,800.00 



Total $51,340,833.83 $51,340,833.83 

These general figures prove the correctness of my pre- 
ceding argument. The road has been built and equipped 
from first mortgage bonds, land grants, and municipal and 
county bonds. There is a leeway here of $1,330,570.17 in 
favor of the correctness of our conclusions. 

Profit to Stockholders 

(See Fourth Annual Report of the State Board of Transportation, 
page 145, year ending June 30, 1890.) 
Proportion of earnings to Nebraska, Chicago, Burlington 

& Quincy Railway $7,944,142.00 

Proportion of expenses to Nebraska, Chicago, Burlington 

& Quincy Railway 4,515,645.00 

Net earnings $3,428,497.00 

Number of miles in Nebraska (same Report, page 136) 2,213.37 

Net earnings per mile $1,549.25 

Interest on $19,111.24 bonds per mile, at 5.09 per cent 972.75 

Net profits to stockholders per mile $576.50 

The amount which they earn on money derived from 
donations is therefore $576.50 (very approximately) for the 
year 1890. 

Let us take the year 1887, which is nearer an average 
year than 1890, considering the years 1883 to 1890 inclu- 
sive. 



,152 ESSAYS AND SPEECHES 

(Report of the State Board of Transportation for the year ending 
June 30, 1887, page 227) 

Proportion of earnings for Nebraska $7,944,814.92 

Proportion of expenses (page 229) 3,811,400.77 

Net earnings for Nebraska $4,135,414.15 

Mileage exclusive of sidings (same Report, page 233 note) . 1,781 .77 

Average net earnings per mile $2,314.20 

Interest on $19,1 11.24 bonds (estimated) at 5.09 per cent. 972.75 

Net profits (approximately) to stockholders, per 

mile $1,341.45 

For this year the stockholders earned on the donations, 
which then amounted to $6,075 per mile (10,825,003.01 pro- 
rated on 1,781.77 miles) the sum of $1,341.45 (very approx- 
imately), or 22 per cent net. 

Perhaps earnings like these would not be considered un- 
reasonable if they were made on money furnished by the 
stockholders. Perhaps they would. But I do not think 
there can be much question that the State is doing no one 
an injustice if the present reasonable maximum rate bill 
presented by Senator Stevens (S. F. 85) is passed, when we 
remember that these earnings are made upon a principal 
sum donated by the people. It may be urged that this 
stock has passed into the hands of innocent holders. The 
answer to this is that the rights of Nebraska citizens, also 
innocent, are at stake. The men whose business makes 
dividends are entitled to consideration at your hands as 
well as those men whose investments take dividends. The 
holders of this stock took it subject to the equities existing 
between the State and the corporation. 

We hear much in reference to Iowa from opponents of 
this bill, as to its population, its business, its square mile- 
age, etc. The arguments proceed upon the assumption that 
such statistics form the basis of rate-making. This is not 
the case. Dakota is about as far behind Nebraska as 
Nebraska is behind Iowa, yet, taken as a whole, the local 



THE STEVENS MAXIMUM RATE BILL 153 

rates of Dakota are lower than the local rates of Nebraska. 
Applying these abstract arguments made in reference to 
Iowa and Nebraska to the case of Nebraska and Dakota, 
we see how little weight should be given them. If these 
arguments are worthy of any consideration whatever, cer- 
tainly Nebraska's rates should be materially lower than 
the local rates of Dakota. 



NEBRASKA RAILROAD RATES 

(Argument before the Board of Transportation of Nebraska, August 
13, 1891. Stenographically reported by B. E. Betts) 

[The Board of Transportation of Nebraska met at the 
State Capitol on the afternoon of August 13, 1891, to gain 
information upon the local rates of Nebraska, Mr. Thomas 
H. Benton, Auditor of State, being chairman of the meeting. 
After some preliminary business had been transacted by 
the Board, Mr. Dawes said:] 

I appear before you to-day in response to the general in- 
vitation requesting any one, believing that the local rates 
charged by the railroads in this State are too high, to ap- 
pear and state the reasons for his belief. I am one of those 
citizens of Nebraska who believe that the present schedule 
of local rates in this State is operating to prevent the in- 
ternal development of the resources of the State, and to 
the great injury of the business which the interior portion 
of the State is now endeavoring to transact in the home 
markets of the State. 

[Mr. Deweese, attorney of the Burlington & Missouri 
River Railway, here interposed and quoted law relative to 
the power of the Board to hear argument not given under 
oath if after hearing such argument they intend to make a 
finding of facts as to rates. Mr. Hawley, attorney for the 
Fremont, Elkhorn & Missouri Valley Railway, and Mr. 
Kelley, attorney for the Union Pacific Railway, also spoke 
upon this question. After consultation the Board notified 
Mr. Dawes to proceed with his argument.] 

In the Annual Report for 1890 of the State Board of 
Transportation, in its report on maximum freight rates, I 
find it stated: — 



NEBRASKA RAILROAD RATES 155 

The Burlington system of lines in Nebraska extend over so 
wide a stretch of territory, reaching into those sections supply- 
ing a very small traffic, as well as into sections supplying a very 
considerable traffic, that a tariff of rates adjusted for its lines in 
Nebraska, on the basis declared just in the resolution of the 
Board, would answer fully as well for all other lines in the State. 

I think that this statement of the State Board of Trans- 
portation is correct, and therefore, in pursuing the inves- 
tigations which I have made, I have taken the Chicago 
Burlington & Quincy Railroad rates (which are practically 
the same, so far as the local rates and their relation to the 
through rates throughout the State are concerned, as those 
of other roads) and will make my argument upon the tariff 
sheets of that road as a basis, the local distance tariff sheet 
and the through tariff schedules. 

Now, I state to the Board as a matter of opinion, for 
which I will show the reasons, that the rates of the Chicago, 
Burlington & Quincy Railroad are made for two purposes : 
First — To foster and encourage such internal industries 
in the State as produce commodities for a distant market 
upon which they can get the long haul, at the highest tariff 
which the traffic will bear. Second — To prohibit or render 
impossible such internal industries in the State as have 
a tendency to produce commodities for home markets, 
which the railroads are now hauling in from outside mar- 
kets at high rates for the long haul. 

I will endeavor to show you that the local rates of this 
State which have not been changed since November 1, 
1887, are not rates made to do business upon, but they are 
rates made by which to prevent business. In all through 
tariff rates made to the eastern portions of the State of 
Nebraska, and in the tariff made by railroads all over the 
United States, the different classes of freight bear a regular 
proportion to each other, the second-class rate being such a 



156 ESSAYS AND SPEECHES 

proportion of the first-class rate, and third-, fourth-, and 
fifth-class rates also bearing a uniform proportion to the 
first-class rate. Now, I shall show you that, under the local 
schedule of the Chicago, Burlington & Quincy Railroad 
Company, they proceed to take the classes of freight, under 
which I shall show you the most of the commodities of this 
State are shipped, and arbitrarily raise these classes. In 
other words, I shall show you, not only a general discrimina- 
tion against the internal development of Nebraska on all 
classes of freight by means of high local rates, but I shall 
show you a discrimination against those classes of freight 
under the local distance tariff in Nebraska in which the 
people of this State as producers are most interested. 

In order that I may answer this argument, that because 
the State of Nebraska is not interested in local rates to the 
extent that it is in through rates, and that, therefore, it 
does not make any difference to the people of this State 
what rates we have for our products from one point in the 
State to another point in the State, provided we have a liv- 
ing through rate, — an argument which so many of these 
railroad gentlemen have urged in the past to the effect that 
we are interested only in through rates, — I wish to read 
you a list of articles which I have collated from the western 
classification, the majority of which the interior portion of 
this State is fitted to produce as against outside competition. 
The interior portion of the State of Nebraska is qualified 
to produce these articles, which I shall read, for the home 
markets of the eastern part of the State as against Chicago, 
as against Kansas City, and as against St. Louis, if citizens 
of interior Nebraska had the rates to ship them into the 
home markets of the State. And in reading this long list I 
shall answer the objection that the people of this State are 
not interested in the local rates except upon the articles 
shipped under commodity rates. 



NEBRASKA RAILROAD RATES 



157 



I will now read a list of commodities shipped under 
fourth and fifth classes which could be produced for home 
markets by interior Nebraska with fair local rates, but 
which are now discriminated against by local rates to an 
extent practically prohibitive. 

Western Classification — Exhibit "A" 
Fourth Class 



Flax meal 

Flour paste in barrels 

Animal food in boxes 

Glucose, grape and glucose syrup 

Glucose refuse and sugarmeal 

Glue stock in bbls. or hhds. 

Grease in barrels 

Handles (wood) N.O.S. crated 

Harness oil soap 

Harrow teeth in barrels 

Fire brick 

Fire tile 

Dried meats 

Dried vegetables 

Earthenware chimneys in sections 

Egg box stuff in bundles or racks 

Egg carrier filling, K.D. 

Felt paper 

Felt pipe covering 

Straw paper for carpet lining 

Catsup in tin cans boxed 

Sidewalk tile cement 

Barley sprouted 

Corn malt 

Condensed milk 

Coops, returned 

Cracklings, in packages 

Paper crates 

Crockery in crates, casks, or hhd. 

Artificial stone 

Axle grease in boxes 

Beans in barrels 

Dried beef in crates 

Cabbage in crates 

Potatoes in sacks 

Turnips in sacks 

Castor beans 

Hogs dressed 

Paint 



Pickled beef 

Pickled pigs' feet 

Plaster, N.O.S. 

Potatoes, N.O.S. 

Tile roofing 

Potted meat 

Dried sausage 

Glass scrap 

Lead scrap 

Sewer pipe 

Leather shavings 

Straw wrapping paper 

Wall finish, N.O.S. 

Fertilizers 

Fuel compositions 

Grass seed 

Lap boards 

Blue grass seed 

Butter hermetically sealed 

Butter ladles 

Candles 

Cracker meal 

Peas 

Pickled bladders in barrels 

Glue in barrels 

Bone ash 

Common brick 

Pressed brick 

Building paper, etc. 

Butter crocks and jars boxed 

Butter tubs and firkins 

Door mats 

Mattresses 

Bread meal 

Paper pails 

Water pails 

Paper bottles 

Baking powder 

Sausage 



158 



ESSAYS AND SPEECHES 



Meat sausage 

Leather scraps 

Shoe blacking 

Stamped ware 

Waste 

Window fixtures boxed 

Blackboards 

Hog intestines 

Hoofs and horns 

Hop poles 

Horse and mule shoes 

Jelly in tin cans 

Kalsomine 

Kraut 

Lard in cans boxed or crated 

Lettuce in bulk 

Linseed meal 

Oil cake meal 

Meats, N.O.S. 

Old rope 

Oyster plant 

Parsnips 



Cutsoles 

Picket pins 

Packed pork 

Tomato pulp 

Fertilizing salt 

Sand 

Sawdust 

Iron scrap 

Leather scrap in boxes or barrels 

Shavings 

Sod 

Smoked tongues 

Evaporated fruit 

Fruit baskets 

Dry glue 

Harness blacking 

Apple seed 

Bone black 

Butter color in barrels 

Butter moulds 

Felt for carpet lining 

Leather counters 



Fifth Class 



Linseed oil 

Canned meats 

Mould boards 

Pickled beef 

Salted meats 

Sausage cases 

Soap, N.O.S. 

Split peas 

Tallow 

Vegetables, dried or desiccated 

Vinegar 

Dried meats 

Earthenware 

Tannin extracts 

Animal food 

Ginger ale 

Grease 

Harness oil soap 

Hogs' hair and plastering 

Hominy 

Jelly 

Kaolin 

Lard oil 

Axle grease 

Paper bags 

Cracklings in packages 



Beans in sacks or barrels 

Hard bread 

Catsup 

Jelly 

Mince meat 

Barley, pearl 

Pop corn 

Cerealine 

Meats, N.O.S. 

Condensed milk 

Paste (flour) 

Printed wrapping paper 

Meat preserving salt 

Scouring materials 

Canned soup 

String beans 

Toothpicks 

Preserved vegetables 

Door braces 

Dried vegetables 

Eggs, condensed in cans 

Felt pipe covering 

Glucose, grape and glucose syrup 

Hair rope 

Harrow teeth 

Hollow ware 



NEBRASKA RAILROAD RATES 159 



Horse and mule shoes 


Castor beans 


Kalsomine 


Pickles 


Lard 


Horseradish 


Apples 


Fruit butter 


Bags 


Mustard 


Beans 


Crockery 


Dried beef 


Cracked wheat 



I will not weary the Board by reading them all over, but 
here are some 150 commodities which this State is fitted 
naturally to produce for the home markets of the eastern 
portion of the State, but which I will show they are shut 
out of by unjust and discriminatory local rates, which are 
preventing the development of interior Nebraska to the 
benefit of these outside wholesale points. I wish to show 
you how these classes of goods in which the people are most 
interested, the fourth and fifth classes, are discriminated 
against under the local distance tariff as compared with 
fourth and fifth classes under the through tariffs from out- 
side points to the State. In order to get at this comparison, 
I have taken about thirteen Nebraska points and the 
through rates to these points from Chicago, and ascer- 
tained the percentage which the fourth-class rate bears to 
the first-class rate, and which the fifth-class rate bears to 
the first-class rate. 

I will read the tables showing relative discriminations 
of the local distance tariff of the Chicago, Burlington & 
Quincy Railway, against fourth- and fifth-class freight 
as compared with fourth- and fifth-class freight shipped 
under the through freight tariff from Chicago to Nebraska 
points. 



160 



ESSAYS AND SPEECHES 



First table showing the average relation of fourth- and fifth-class 
freight to first-class freight under the through tariff of the Chicago, 
Burlington & Quincy Railway, to thirteen Nebraska points 



Chicago to 



Ist-cl. 


tfh-cl. 


5th-cl. 


rate 


rate 


rate 


75 


30 


25 


80 


34 


28 


110 


35 


45 


120 


58 


50 


126 


60 


51 


135 


70 


59 


148 


82 


71 


80 


34 


28 


100 


47 


37 


110 


55 


45 


126 


60 


51 


146 


77 


66 


90 


42 


35 



Per cent 

Jjfth-cl. rate of 

lst-cl. rate 



Per cent 

5th-cl. rate of 

lst-cl. rate 



Omaha 

Lincoln 

Fairmont 

Harvard 

Hastings 

Kearney 

Indianola. . . . 

Wahoo 

Seward ..... 

York 

Grand Island 
Broken Bow . 
Beatrice 



Average percentage which fourth-class rate is of first-class rate under the through 
tariff from Chicago, 47 9 /i3 per cent. 

Average percentage which fifth-class rate is of first-class rate under the through tariff 
from Chicago, 40 per cent. 



Second table showing the average relation of fourth- and fifth-class 
freight under the local distance tariff of the Chicago, Burlington 
& Quincy Railway for Nebraska 



Miles 


lst-cl. 
rate 


Jlth-d. 

rate 


5th-cl. 
rate 


Per cent 

bth-cl. rate of 

lst-cl. rate 


Per cent 
5th-cl. rate of 
lst-cl. rate 


5 


$.13 
.22 
.32 
.52 
.63 
.73 
.78 
.83 
.88 
1.10 
1.35 
1.60 


$.07 
.14 
.21 
.35 
.40 
.46 
.51 
.56 
.61 
.76 
.91 

1.06 


$.06 
.10 
.16 
.30 
.35 
.41 
.46 
.51 
.56 
.71 
.86 

1.01 


.55 
.64 
.66 
.67 
.63 
.63 
.65 
.67 
.70 
.70 
.68 
.66 


.46 


25 


.45 


50 


.50 


100 


.58 


150 


.55 


200 


.56 


250 


.58 


300 


.61 


350 


.64 


400 


.65 


450 


.63 


500 


.63 







Average percentage which fourth-class rate is of first-class rate under the local distance 
tariff, 65 3 /w per cent. 

As against the through tariff average of preceding table, 47 9 /is per cent. 

Average percentage which fifth-class rate is of first-class rates under the local distance 
tariff, 57 per cent. 

As against the through tariff average of preceding table, 40 per cent. 



NEBRASKA RAILROAD RATES 161 

Thus we see that this railroad company, in order to pre- 
vent the supplying of home markets by the interior of the 
State, which would decrease their business into the State 
under the through rates, arbitrarily raises the fourth and 
fifth classes out of their usual proportion to the first class 
for the sake of putting an additional burden on fourth and 
fifth class. 

I will now show you the relation of that condition of 
affairs to the home markets of the State. I have indicated 
on this chart what portion of the State of Nebraska can com- 
pete in the home markets of Nebraska as against Chicago, 
Kansas City, and Omaha on these very products which I 
have named (which are shipped as fourth- and fifth-class 
freight). I do this in order to show the relative discrimina- 
tion against the citizens of interior Nebraska on fourth and 
fifth classes in their own home markets. I will state, in the 
first place, that this map is not large enough to indicate the 
distance on the proper scale from Chicago to Omaha, a dis- 
tance of 508 miles by the Chicago, Burlington & Quincy 
Railroad, yet I have drawn a curved line around the city of 
Omaha which represents about the limit of the area where 
fourth- and fifth-class shippers in interior Nebraska can 
ship into Omaha at equal rates with Chicago; that circum- 
ference is located only 125 miles from the city of Omaha. 
No man in the State of Nebraska located outside of that 
little circle, a distance at all points of only 125 miles from 
Omaha, can compete on fourth- and fifth-class freight with 
Chicago 500 miles away from Omaha, the best home market 
of Nebraska. Consider what a tremendous discrimination 
against the development of interior Nebraska upon f ourth- 
and fifth-class rates is presented by that circle! Take the 
fourth- and fifth-class rates from St. Louis and Kansas City 
to Omaha and see how far they will carry freight under 
fourth- and fifth-class rates of the local distributing tariff. 



162 ESSAYS AND SPEECHES 

You will find it is 108 miles. You will find that any citizen 
of Nebraska living at a distance of 108 miles from the city 
of Omaha pays as high a rate on fourth- and fifth-class 
freight to Omaha as is paid by the St. Louis shipper to 
Omaha, 455 miles away. And this is the local rate system 
of the State which they uphold here and say is reasonable : 
a system which is bringing even the lighter farm products 
of Iowa into Nebraska home markets as against the do- 
mestic shipper in the interior of the State. Take the city of 
Lincoln and draw a circle around it with a radius of 125 
miles, and not a man outside of that area in the State of 
Nebraska can fairly compete as against the Chicago ship- 
per on fourth- and fifth-class freight in Lincoln, the second- 
best home market of the State. One hundred and twenty- 
five miles as against 542 miles from Chicago to Lincoln, and 
remember that every man on the Chicago, Burlington & 
Quincy Railroad between Chicago and Omaha and Chicago 
and Lincoln gets the Chicago rate or less than the Chicago 
rate! 

Are you, gentlemen of the Board, to keep in force these 
rates for the benefit of Iowa, for the benefit of the Kansas 
City shipper, for the benefit of the Chicago shipper, and for 
the benefit of the St. Louis shipper, as against the interests 
of the citizens of interior Nebraska? 

Secretary of State Allen: Take some certain article and 
give us an illustration by comparison of shipments to Lin- 
coln. 

Mr. Dawes: I have read here 150 articles. I will state 
again, however, some of the articles upon which this dis- 
crimination against the interior shipper is found. I read here 
articles shipped fourth and fifth class. [Mr. Dawes then 
re-read a portion of the list of commodities given before.] 
I have the list if these gentlemen wish to inform themselves 
upon the commodities. 



NEBRASKA RAILROAD RATES 163 

Auditor of State Benton: Do I understand you to say that 
jelly in glasses is a fourth- and fifth-class article? 

Mr. Dawes: Yes, sir; it depends upon the way it is packed, 
of course. Sometimes it goes under other classes when 
packed differently. 

Secretary of State Allen: Do I understand you are stating 
the case of the Lincoln jobber? 

Mr. Dawes: I am simply stating my opinion as a citizen 
of Nebraska. I believe, however, that the future prosperity 
of Lincoln depends upon the proper development of the 
interior of the State. The line drawn around Lincoln has 
nothing to do with the shipments from Lincoln out, but I 
am speaking of the man who ships into Lincoln and wishes 
to use Lincoln as a home market, and ship these different 
goods into a home market. The interest which the farmers 
of Nebraska have in the building-up of home markets is 
very great. On many of the farm products, as I will show 
you by my tables, the farmer is discriminated against in 
his own home markets by these exorbitant local rates. I 
know that so far out as Burlington on the Chicago, Bur- 
lington & Quincy Railroad in Iowa men are shipping cheese 
in here. We want such a local rate system in this State that 
the internal development of the State may be encouraged 
rather than retarded by the rates. I take it the position of 
Mr. Holdredge is that they will give the rates as fast as we 
get the factories. I say make living rates first and the facto- 
ries and other industries will spring up afterwards. If the 
State of Nebraska, through its Board of Transportation is 
going to assume that, because of the generosity of the rail- 
road company, they will send their men around to look up 
these little industries in the State and give them commodity 
rates, it is going to make a very great assumption. What 
we want is local rates upon which business can be done in 
the home markets of Nebraska. It is from small beginnings 



164. ESSAYS AND SPEECHES 

that a large business generally has its growth. And here 
this gentleman [Mr. Holdredge] comes up before you and 
says we will have the rates when we have the business. 
What I want to know is how we will be able to start up a 
business here and have a rate in the State which on f ourth- 
and fifth-class freight keeps out the shipper over 125 miles 
from Lincoln as against 542 miles from Chicago to Lincoln? 
That is the way they protect the infant industries of Ne- 
braska ! That is the way they build them up ! 

Auditor of State Benton: You stated the through rate was 
made up of the sum of the local and through rate to Omaha. 
Is that correct? 

Mr. Dawes: Yes, sir, that is correct. By the local I mean 
the local distributing rate. The distributing Lincoln and 
Omaha rate is not the local distance tariff rate, however. 
The rate, for instance, to Hastings is made by the sum of 
the rate to Lincoln or Omaha and the distributing rate from 
Lincoln or Omaha to that point. I am not speaking of 
commodity rates; I am talking of those articles which are 
shipped under the local distance and distributing tariff. I 
have my belief as to the coal rate and the wood rate and 
corn rate, but what I am arguing on and what is before this 
Board for consideration and for readjustment is the local 
distance tariff rate, classes 1, 2, 3, 4, 5, A, B, C, D, E, and 
the local distributing rates when used on east-bound ship- 
ments. 

Auditor Benton: Don't you think the people of this State 
are much more interested in cattle than they are in hoop- 
poles and jelly? 

Mr. Dawes: A great deal more, but in submitting hoop- 
poles and jelly I submitted 150 other articles, and I have 
more tables which I shall submit to you — 600 articles 
shipped under these ten classes besides hoop-poles and 
jelly, all of which the citizens of Nebraska could produce 



NEBRASKA RAILROAD RATES 165 

and sell to the home markets of the State, as against these 
outside points, if they had the rates. 

What can the future development of the State of Ne- 
braska be with such discrimination as that against it? And 
what is the cure for it? Mr. Holdredge suggests the giving 
of discriminatory commodity rates to the big man after he 
gets big without giving him a chance to grow big. 

Mr. Munroe, of the Union Pacific Railway: Do I under- 
stand you to say that Nebraska men are discriminated 
against as compared with Chicago? For instance, that if 
a man in Lincoln buys goods in Chicago and ships them to 
Lincoln and redistributes them for points west, he pays a 
higher rate than the Chicago man shipping to the same 
point? 

Mr. Dawes: No, certainly not. I say that the Chicago, 
Omaha, and Lincoln rates to any given point in the State 
are exactly the same; but I wish to show pretty soon the 
relative discrimination in favor of these two cities of Lin- 
coln and Omaha as against some other small cities which, 
under Mr. Holdredge's assumption, ought to be sought out 
and helped a little. 

Attorney-General Hastings: Those, though, only refer to 
Lincoln and Omaha? 

Mr. Dawes: No, sir. There are other distributing points 
in the State; Hastings, I believe, has recently had a dis- 
tributing rate, and Nebraska City has a distributing rate. 

Mr. Holdredge, of the Burlington & Missouri River Rail- 
way: Has Fremont? 

Mr. Dawes: I don't know whether Fremont has or not. 

Mr. Holdredge: How about the rates from all the Mis- 
souri towns ? The rate from every river town is the same. 

Mr. Dawes: That is for business coming from Chicago to 
points in the State; that is the through rate; I am com- 
plaining of the disproportion and resulting discrimination 



166 ESSAYS AND SPEECHES 

from the difference between the local rates in the State and 
the through rates to the State. 

Mr. Holdredge, of the Burlington & Missouri River Rail- 
way: I would like to ask if you think the through rates are 
too low? 

Mr. Dawes: I think the through rates are too high. Under 
all the other rate systems of this country the rule is pre- 
served, with very few exceptions, that the rate decreases 
proportionately to the distance because the cost of service 
decreases in that proportion. The rate per ton per mile 
should decrease proportionately with the distance of the 
haul. Now, what is the condition of affairs so far as Ne- 
braska is concerned? Do they preserve that rule? Do they 
follow it? Not at all. They take the through rate per ton 
per mile to the cities of Lincoln and Omaha, and then add 
the local distributing rate, which increases the per ton per 
mile rate after freight leaves the cities of Lincoln and 
Omaha whether the freight is shipped directly from Chicago 
to the interior point or whether reshipped at Omaha or 
Lincoln. The theory of decreasing rates per ton per mile is 
followed until they get from Chicago to Lincoln and Omaha, 
and then the local distributing rate is added as against the 
interior portions of the State, making the through rate to 
interior points the sum of the through rate to Lincoln or 
Omaha plus the local distributing rate from either of those 
two cities to the interior point. 

Mr. Holdredge: Do you know what the purchaser in 
Hastings pays for a farm wagon as compared with the pur- 
chaser in Des Moines, Iowa? Or can you show me any- 
thing the farmer buys in Hastings and pays more for than 
in Des Moines, Iowa? 

Mr. Dawes: When you come to your time for speaking, 
you can make that argument if there is anything in it. 

Mr. Munroe, of the Union Pacific Railway: Do you think 



NEBRASKA RAILROAD RATES 167 

that a uniform percentage should govern between first, 
second, third, fourth, and fifth classes, and classes A, B, 
C, D, E, in all sections of the country? 

Mr. Dawes: Not being acquainted with the conditions 
which exist in all sections of the country, I certainly should 
not be foolish enough to attempt to answer that question. 

Mr. Munroe, of the Union Pacific Railway: Do you think 
that the man who loans money in New England ought to 
get the same rate of interest as the man who loans in west- 
ern Nebraska? That is a parallel case. 

Mr. Dawes: I wish you to make that argument to the 
State Board of Transportation, if you desire. I wish to call 
the attention of the Board to this fact : That the argument 
that we have heard in the past against the lowering of this 
class of through rate is this, — that the State of Nebraska 
does a very small local business and these roads must there- 
fore charge higher on the last end of a long haul because 
local business in these districts is so small. Yet I have 
shown that this road, running through the unsettled por- 
tion of the country, has a system of local rates in this State 
which are practically prohibitive for the sake of allowing 
this road a high tariff on the long-haul plan on commodi- 
ties hauled into the State. They have put such rates in 
force as prevent the transaction of local business, and then 
claim that because there is no local business, high through 
rates must be charged and the rate per ton per mile on the 
long haul into the State must be increased as the distance 
increases. I have prepared a set of tables here. I did not 
get a notice of this meeting — being absent from the city — 
in time to properly prepare this statement for to-day, but 
I wish to present in a short time to the Board of Trans- 
portation a list of some six hundred articles taken from 
the Western Classification tabulated for Nebraska, into 
classes 1, 2, 3, 4, 5, A, B, C, D, E. These commodities 



168 ESSAYS AND SPEECHES 

which I have copied out are those which in my judgment 
could be produced by the citizen of interior Nebraska in 
competition with the wholesale points of Chicago, St. 
Louis, and Kansas City. I have also prepared another set 
of tables by which the relative discrimination against in- 
terior Nebraska in the home markets of Omaha and Lin- 
coln is shown. These tables show how interior Nebraska 
is shut out of the home markets by these unreasonable 
local rates. I have taken the fourth and fifth classes in 
my preceding illustrations because they are discriminated 
against the greatest, and because it is the fourth and fifth 
classes in which the people of this State are mostly inter- 
ested. These tables include all classes. Let me read them. 

Table showing the distance from Omaha at which a citizen of interior 
Nebraska shipping to Omaha, under the local merchandise tariff, 
pays the same rate as a Kansas City shipper pays to Omaha, 200 
miles distant from Kansas City 

1st class rate, $.40 from Sutton, Neb., 123 miles to Omaha against 200 miles Kansas City to Omaha 



2d " 


t< 


.35 


«( 


Sutton, 


» 


123 


3d " 


" 


.28 


n 


Grafton, 


•t 


115 


4th » 


ft 


.23 


it 


Friend, 


•* 


92 


5th " 


" 


.19 


M 


Friend, 


" 


92 


Class A 


'» 


.17 


•« 


Grafton, 


•» 


115 


" B 


•» 


.13 


•f 


Crete, 


« 


75 


" C 


«• 


.11 


if 


Crete, 


♦• 


75 


" D 


t< 


.09 


fl 


Crete, 


•• 


75 


» E 


if 


.07 


" 


Exeter, 


" 


101 



Every point on the Chicago, Burlington & Quincy line 
between Kansas City and Omaha takes the Kansas City 
rate or less to Omaha. 

Table showing the distance from Lincoln at which a citizen of interior 
Nebraska shipping to Lincoln, under the local merchandise tariff, 
pays the same rate as a St. Louis shipper pays to Lincoln, J+66 
miles distant from St. Louis 



i'st class f r't, $.60 from Atlanta, Neb., 160 mi. 


to Lincoln, against 466 mi. St. Louis to Lincoln 


2d " " .45 " Lowell, " 123 » 


ti « 


1 tt 


3d " " .36 " Juniata, " 103 " 


ii i 


t ft 


4th " " -29 " Kenesaw, " 112 «• 


ii f 


f ft 


5th " " .23 " Hastings, " 97 •« 


ti i 


t ft 


Class A " .255 " Axtell, «« 138 « 


it i 


I it 


" B « .205 " Holdredge, " 152 •« 


if 1 


f f« 


" C " .18 " Holdredge, " 152 " 


ti f 


i If 


M D ** .156 " Culbertson, •« 240 «« 


ft i 


• " 


«• E " .14 " Benkelman, " 281 " 


tt 1 


« ft 



NEBRASKA RAILROAD RATES 



169 



Every point on the Chicago, Burlington & Quincy line 
between St. Louis and Lincoln takes the St. Louis rate to 
Lincoln, or less. 

Table showing the distance from Omaha at which a citizen of interior 
Nebraska shipping to Omaha, under the local merchandise tariff, 
pays the same rate as a St. Louis shipper pays to Omaha, 455 
miles distant from St. Louis 



1st class fr't, $.55 from Lowell, Neb., 178 miles to Omaha, against 455 miles St. Lou: 



2d " « 


.40 « 


Harvard, 


3d " • 


.32 « 


Sutton, 


4th » « 


.25 « 


Fairmont, 


5th » « 


.20 « 


Exeter, 


Class A " 


.225 ' 


Harvard, 


» B " 


.175 « 


Hastings, 


<• c .< 


.15 " 


Hastings, 


.< D .. 


.125 « 


Kearney, 


« E « 


.11 « 


Loomis, 



s to Omaha 



Every point on the Chicago, Burlington & Quincy line 
between St. Louis and Omaha, Nebraska, takes the St. 
Louis rate or less to Omaha. 

Table showing the distance from Omaha at which a citizen of interior 
Nebraska shipping to Omaha, under the distributing merchandise 
rates, pays the same rate as a Chicago, Illinois, shipper pays to 
Omaha, 508 miles distant from Chicago 

miles Chicago to Omaha 



1st class fr't, $.75 from Dunning, Neb 


, 265 miles to Omaha, against 


2d " '• 


.60 " Bertrand, " 


222 " " 


3d » •• 


.42 " Juniata, " 


157 " «• 


4th " " 


.30 " Hastings, " 


151 " » 


6th " 


.35 " Aurora, " 


128 " « 


Class A «« 


.30 " Holdredge," 


206 " « 


» B •« 


.25 " Loomis, " 


214 « " 


«« C i< 


.20 " Minden, " 


183 •« .* 


» D " 


.175 " Linscott, " 


226 " »« 


4. E t, 


.16 « Mullen, ■« 


319 " " 



Every point on the Chicago, Burlington & Quincy line 
between Chicago and Omaha in Illinois and Iowa takes 
the Chicago rate or less to Omaha. 

Table showing the distance from Lincoln at which a citizen of interior 
Nebraska shipping to Lincoln, under the distributing merchan- 
dise rates, pays the same rate as a Chicago shipper pays to Lincoln, 
5^2 miles distant from Chicago 

1st class rate $.80 from Hyannis, Neb., 302 miles to Lincoln, against 542 miles Chicago to Lincoln 



2d " 


11 


.65 « 


4 Natick, «' 230 


3d " 


«• 


.46 


• Holdredge, " 152 


4th « 


" 


.34 ' 


' Newark, " 129 


5th " 


«« 


.28 ' 


' Lowell, " 123 


Class A 


<« 


.a3 ' 


' Bartley, " 211 


" B 


*» 


.28 ' 


Indianola. " 217 


" C 


«< 


.23 < 


4 Mullen. " 264 


•• D 


•I 


.205 " Lisbon.' " 354 


" E 


" 


.19 « 


' Berea, " 371 



170 ESSAYS AND SPEECHES 

Every point on the Chicago, Burlington & Quincy line 
between Chicago and Lincoln, Nebraska, in Illinois and 
Iowa takes the Chicago rate or less to Lincoln. 

Table 1 — Showing the distance from Omaha, at which a citizen of 
interior Nebraska, shipping between two Nebraska points, under 
the local distance tariff of the Chicago, Burlington & Quincy Rail- 
way, pays the same rate as a Chicago, Illinois, shipper pays to 
Omaha, 508 miles distant from Chicago 

1st class f r't, $.75 from a point in Nebraska, 220 mi. to Omaha, against 508 mi. Omaha from Chicago 

« " 110 " « " " 

" " 75 " " " " 

.4 .4 75 .4 4. .4 44 

44 44 165 .4 44 .4 44 

44 .4 190 .4 .4 44 44 

44 .1 170 4. .4 4. 4, 

44 .4 240 " » " " 

44 44 320 « " » « 



Table 2 — Showing the distance from Lincoln, Nebraska, at which 
a citizen of interior Nebraska shipping between two Nebraska 
points, under the local distance tariff of the Chicago, Burlington & 
Quincy Railway, pays the same rate as a Chicago, Illinois, 
shipper pays to Lincoln, 5^2 miles distant from Chicago 

1st class fr't, $.80 from a point in Neb. 270 mi. to Lincoln, against 542 mi. Lincoln from Chicago 
2d " " .65 " 200 " 



2d '« " 


.60 


3d " 


.42 


4th " " 


.30 


5th «« 


.25 


Class A " 


.30 


44 B " 


.25 


44 C .4 


.20 


44 J) 4 


.17*5 


«« E * 


.16 



3d «• " 


.46 


44 


130 " 


4th " " 


.34 


44 


95 " 


5th " " 


.28 


*4 


90 " 


Class A " 


.33 


44 


195 •« 


.4 B " 


.28 


" 


220 " 


4. C » 


.23 


44 


220 " 


♦I D 44 


.205 


44 


300 " 


44 E 4. 


.19 


" 


370 «• 



Table 3 — Showing the distance from Beatrice, Nebraska, at which 
a citizen of interior Nebraska shipping between two Nebraska 
points, under the local distance tariff of the Chicago, Burlington & 
Quincy Railway, pays the same rate as a Chicago, Illinois, shipper 
pays to Beatrice, 592 miles distant from Chicago 



1st class fr't, $.90 from 
2d " " 75 


ei point in 


Neb. 350 mi. to 
300 «• 
170 " 


Beatrice, against 592 mi. Beatrice from Chicago 


3d " " M 


44 


44 44 '4 


4th " " .42 


44 


170 " 


44 44 »4 


5th " •' .35 


44 


150 « 


44 44 44 


Class A " .38 


4' 


240 " 


44 44 44 


" B " .31 


44 


250 " 


44 44 44 


" C " .26 


44 


280 M 


44 44 44 


" D " .235 


•4 


350 " 


44 44 44 


m e " .21 


44 


290 " 


44 44 44 



NEBRASKA RAILROAD RATES 171 

Table £ — Showing the distance from Omaha, Nebraska, at which a 
citizen of interior Nebraska shipping between two Nebraska points, 
under the local distance tariff of the Chicago, Burlington & 
Quincy Railway, pays the same rate as a St. Louis shipper pays to 
Omaha, £55 miles distant from St. Louis 

1st class fr't, $ .55 from a point in Neb. 110 mi. to Omaha, against 455 mi. to Omaha from St. Louis 

2d " «• .40 " 80 " " " » 

3d " " .32 " 70 " m «• « 

4th " •« .25 " 60 " " " " 

6th " " .20 " 60 " " " " 

Class A " .225 •« 85 •' " " " 

" B » .175 " 110 " " " " 

» C " .15 " 110 " " •• " 

" D •' .125 M 110 " •• » •* 

» E » .11 " 220 " " " " 

Table 5 — Showing the distance from Lincoln, Nebraska, at which 
a citizen of interior Nebraska, shipping between two Nebraska 
points, under the local distance tariff of the Chicago, Burlington & 
Quincy Railway, pays the same rate as a St. Louis shipper pays to 
Lincoln, £66 miles distant from St. Louis 

1st class fr't, $.60 from a point in Neb. 135 mi. to Lincoln, against 466 mi. to Lincoln from St. Louis 
2d » •* .45 " 100 " " " " 



3d " '« 


.36 


« 


80 


4th » « 


.29 


«« 


70 


6th •• « 


.23 


•« 


70 


Class A " 


.255 


«« 


115 


.. B >• 


.205 


ti 


140 


♦• C " 


.18 


ii 


140 


« D " 


.155 


»« 


190 


« E " 


.14 


" 


280 



Table 6 — Showing the distance from Beatrice, Nebraska, at which 
a citizen of interior Nebraska, shipping between two points in 
Nebraska, under the local distance tariff of the Chicago, Burlington 
& Quincy Railway, pays the same rate as a St. Louis shipper pays 
to Beatrice, £53 miles distant from St. Louis 

1st class fr't, $.70 from a point in Neb. 185 mi. to Beatrice, against 453 mi. to Beatrice from St. L- 



2d » " 


.55 


M 


150 " 


3d " " 


.44 


»* 


120 " 


4th " " 


.37 


•« 


120 " 


5th " " 


.30 


*« 


105 " 


Class A '• 


.305 


•* 


165 « 4 


» B " 


.235 


« 


170 " 


« C « 


.21 


'* 


190 " 


.. D « 


.185 


*' 


250 " 


« E " 


.16 


" 


320 »• 



Table 7 — Showing the distance from Omaha, Nebraska, at which 
a citizen of interior Nebraska, shipping between two Nebraska 
points, under the local tariff of the Chicago, Burlington & Quincy 
Railway, pays the same rate as a Kansas City or Leavenworth 
shipper pays to Omaha, 200 miles distant from Kansas City 

1st class fr't, $.40 from a point in Nebraska 70 mi. to Omaha, against 200 mi. Kansas City to Omaha 

2d » " .35 " 65 " 

3d " " .28 •« 55 " «• '• " 

4th " " .23 •• 55 " « " " 

5th " » .19 " 60 « " " " 

Class A " .17 " 55 « «• " " 

" B " .13 " 70 «• •« " ** 

t. c ii Al .i 70 " " «' •« 

» D " .09 » 90 " «« " " 

» E *• .07 " 140 " " " •« 



172 ESSAYS AND SPEECHES 

The rates from Kansas City and Leavenworth to Omaha 
are the same as the rate from Kansas City and Leavenworth 
to Lincoln (237 miles from Kansas City) and Beatrice. 

Just think of the abstract unreasonableness of these 
fourth- and fifth-class rates. From Crete to Hastings is 
about 77 miles, and the shipper from Crete to Hastings 
under the fifth-class rate would pay as high a fourth- or 
fifth-class rate as the shipper from Chicago to Omaha, 508 
miles. 

Auditor Benton: How would it be on brick shipped in 
Nebraska as compared with brick shipped in Iowa? 

Mr. Dawes: I cannot tell you, sir; I have made no com- 
parison on brick. I am speaking of local distance tariff 
rates. 

Auditor Benton: How is it with hay and straw? 

Mr. Dawes: Those are shipped under the commodity 
tariff. 

Auditor Benton: They are shipped locally, are they 
not? 

Mr. Dawes: Not to any large extent. There is hay in this 
State shipped from one point to another, occasionally. 

Auditor Benton: Don't you know that there were over 
six hundred cars of stone shipped from Weeping Water to 
Lincoln? 

Mr. Dawes: I am very glad to hear it, and I came here to 
argue the importance of the local distance tariff rates in the 
State of Nebraska. I think with you that the local business 
done is much larger in proportion to the through business 
than has been stated by these gentlemen. They have said 
it is ten per cent, and my belief is that the local business of 
this State bears a proportion of at least thirty to thirty-five 
per cent of the total business done in the State on through 
rates. If that is not the case, these roads here are great ex- 
ceptions to the general rule. The larger the local shipments 



NEBRASKA RAILROAD RATES 173 

in the State, the more important it is for us to get fair and 
equitable local rates in the State. 

Auditor Benton: Is n't the local rate in Nebraska lower 
than it is in Iowa? 

Mr. Dawes: I wish you would make your argument to 
your colleagues on the State Board of Transportation, and 
show that. I would be glad to hear about it from you. 

In this matter of distributing rates, the through rates to 
interior Nebraska points which Chicago, Omaha, and Lin- 
coln enjoy are the same. Now, if a man wants to start in 
the wholesale business in interior Nebraska, in order to 
compete with the Chicago, Omaha, and Lincoln wholesal- 
ers, he must ship under something else than the local dis- 
tance tariff for the reason that the sum of the through rate 
from Chicago or St. Louis to whatever point it is in Ne- 
braska in which he desires to start a wholesale business, 
plus the local distance tariff rate to the point in which he 
desires to sell his goods, would be more than the sum of 
the rates from Chicago to Omaha or Lincoln plus the dis- 
tributing rates to that point. Therefore, in addition to 
these general discriminations against points in interior 
Nebraska in home markets, we see another discrimination 
against these points in the matter of distributing business. 
We see that the rate system we have in Nebraska is inter- 
fering with the natural growth and development of the 
State. For not only is it impossible to ship from the in- 
terior portions of Nebraska to the home markets of the 
State because of the unjust proportion existing between 
through and local rates, but it is impossible for the most 
of the smaller towns to do any wholesaling to any point 
west. Take a great many of the towns in the State, such as 
York, for instance. York can have no wholesale business, 
and it has practically no home market in the State to which 
to ship its products. 



174 ESSAYS AND SPEECHES 

And this general discrimination against the State of 
Nebraska is something in which the citizens of Omaha and 
Lincoln are just as much interested as the people in the 
interior of the State. For it is a very short-sighted policy 
which holds that a policy of rate-charging detrimental to 
the best interests of Nebraska is beneficial to its two larg- 
est cities. This long-haul theory is an old theory. Yet I 
have never heard the long-haul theory urged against rates 
of Nebraska before. The object of these discriminations, 
however, is plainly to carry out the long-haul plan. Why 
should the local fourth- and fifth-class rates be raised so far 
out of proportion to first-class rates if it is not that the rail- 
road companies do not desire business done between local 
points on these classes ? The people look to you, gentle- 
men, as servants of the people employed to protect their 
interests, for such protection in these local rates as will give 
them a chance to do business in the home markets of the 
State. I trust, gentlemen, that you are willing to do your 
duty and act on your best judgment for the interests of 
the people in this section of God's country. I ask you not 
to make up your judgment solely by a comparison of the 
rates of this State with the rates of Colorado, Dakota, Kan- 
sas, or Iowa, and decide that because Iowa has so many 
people to the square mile, so many miles of railroad, and is 
in those regards ahead of Nebraska, therefore you should 
not change the Nebraska rates. Is that the basis upon 
which these rate schedules are formed, and upon which 
these rates are figured? Not at all; and in no way can the 
absurdity of that style of argument which we have heard 
so much before this State Board of Transportation and be- 
fore the railroad committees in charge of railroad legisla- 
tion — in no way can the absurdity of it be better illus- 
trated than to take the State of South Dakota, which is as 
far behind the State of Nebraska as Nebraska is behind 



NEBRASKA RAILROAD RATES 175 

Iowa, and find that in Dakota the local rates are better 
to-day than the local rates of Nebraska. 

Mr. Munroe : How do you account for the fact that 
Dakota is so much behind Nebraska in prosperity if she 
has the local rates very much better than the State of Ne- 
braska; and would not that dispute your statement that 
the reduction of rates is the only thing necessary for greater 
prosperity? 

Mr. Dawes: I have never claimed that low railroad rates 
are the only basis of prosperity. I am willing to concede 
this point, however: That very often the abstract rate 
charged does not make so much difference. Take, for in- 
stance, the case of Lincoln here and what a great commo- 
tion was raised when the differential from Chicago on 
first-class rates between Lincoln and Omaha was ten cents, 
when that rate was sixty-five cents to Omaha and seventy- 
five cents to Lincoln. What was the reason? That was 
because there was a discriminatory rate against Lincoln; 
because she could not get into the interior portions of the 
State with a wholesale business on a par with Omaha upon 
a ten-cent differential. You gentlemen of Nebraska rail- 
roads have seen fit within the last year to make a general 
advance on rates, and you have raised the first-class rate 
to Lincoln and Omaha both ten cents, and yet you do not 
hear any complaint from Lincoln and Omaha? Now, it is 
because of an outrageous discrimination that these com- 
plaints are largely made against the local rate system of 
the State. I do not for a moment admit — and I expressly 
deny — that these local rates are reasonable in themselves, 
considered abstractly, but I do say that in addition to be- 
ing unreasonably high, they are outrageous because they 
discriminate against the interior development of the State 
in favor of eastern Iowa, Chicago, and other outside 
points. 



176 ESSAYS AND SPEECHES 

Mr. Munroe: I understand you to say that the roads 
were doing what they could to crush the infant industries 
of Nebraska? 

Mr. Dawes: I simply stated that the local rates of this 
State were so formed that the infant industries had no 
chance to develop as against outside competition. 

Mr. Munroe: Do you know that one of the most promi- 
nent industries started in this State in the last few years is 
the manufacture of beet sugar? 

Mr. Dawes: I have no doubt that you have given com- 
modity rates, and are willing to give commodity rates, to 
such an establishment as a beet-sugar factory, but you are 
singling out one location in the State; and my point is this: 
Taking the general system of rates as a whole, you are ren- 
dering impossible the proper development of interior Ne- 
braska, and I say that such a general system is wrong and 
unjust and unreasonable. The fact that you have dealt 
justly with one commodity is no reason why you shall not 
deal justly with all. 

There is just one other matter which I want to call the 
attention of the Board to, and that is an important matter. 
The State Board of Transportation announced that the 
Chicago, Burlington & Quincy Railroad, which it took as 
a fair representative of the Nebraska roads, was earning 
only about 5.09 per cent upon its cost. What does that 5.09 
per cent represent? They report it as the percentage formed 
by dividing the net earnings by the cost of the road. Does 
that represent their measure of profits? Not at all. It rep- 
resents the measure of profits not even on the watered stock. 
How, then, do we determine the ability of the road to stand 
a reduction in rates unless we determine what its rates of 
profits are? Admitting, merely for the sake of argument, 
that a reduction of rates means a reduction in earnings, 
you have found that the Chicago, Burlington & Quincy 



NEBRASKA RAILROAD RATES 177 

Railroad Company's earnings for three years, which include 
the "strike year" when the earnings were cut down to 
about one half the usual amount, averaged 5.09 per cent. 
Now, just so long as this Board confuses and mingles the 
very low earnings which the railroad bondholder has upon 
his investment with the very high earnings which the rail- 
road stockholder has upon the intrinsic value of his invest- 
ment, so long as this Board refuses to look into the relation 
of the bond issue of the road to the cost of the road, and 
the relation of the interest paid upon bonds to the earnings 
made from the proceeds of those bonds, just so long will this 
Board cut itself out of the right to act in these premises 
or ever make a reduction of local rates in this State. 

Now, as must be admitted, between the rights of inno- 
cent stockholders and the citizens of Nebraska, also inno- 
cent, the rights of the citizens of Nebraska must prevail. 
Yet we claim that, in assuming that a reduction of the local 
rates in this State would reduce the earnings of the road, 
the railway officials beg the question. It is very doubtful 
if the increase in the local business of the State, which 
would result from fair and equitable living rates, would not 
increase the tonnage of the road so much as to make that 
reduction in the long run profitable. Relative to this long- 
haul theory, I will say that before I came West I lived in a 
country where we had the opportunity of seeing the full 
benefits to be received from its application. The Baltimore 
& Ohio Railroad proceeded on that plan to make the most 
they could for the time being, without regard to the future 
of the country in which they operated, and the result is the 
Baltimore & Ohio Railroad for a long distance on its line 
runs to-day through a wilderness. Contrast the condition 
of the Baltimore & Ohio with the Pennsylvania road, which 
has developed the local business along its system, and see 
how much better the condition of the latter road is, which 



178 ESSAYS AND SPEECHES 

runs through a country not very much better, so far as 
natural resources are concerned, than that of the Baltimore 
& Ohio. 

I talked with a gentleman in New York, the other day, 
who had some Nebraska four per cent extension bonds of 
the Chicago, Burlington & Quincy Railroad which he had 
purchased at eighty cents. What is the reason he was able 
to get those bonds so cheap? It is because the Chicago, 
Burlington & Quincy Railroad is being operated to-day on 
the long-haul theory, and has built away up in the north- 
western portion of this State a line of road along which there 
is little country which can do a local business, with the sole 
idea of getting through business. They have encumbered 
their road since December 13, 1885, with a bonded indebted- 
ness of about $35,000,000, with a consequent increase in 
fixed charges; yet the net earnings are less, with all this in- 
crease in mileage and fixed charges to-day, than they were 
in 1885. The reason is, because, trusting to the long-haul 
theory and striving simply for a through business, they 
have built in a country where they have little local business 
even agriculturally. And following out the theory upon 
which these lines were built and discriminating against all 
local business in the State to-day, they are making the 
same mistake on the rest of the lines that they made on the 
Cheyenne and New Castle lines when they built them. 

Mr. Kelley, of the Union Pacific Railway: Your argument 
is that no road ought to extend its line into or through a 
Western country? 

Mr. Dawes: I simply use these facts as illustrating that 
the Chicago, Burlington & Quincy Railway is operated on 
the long-haul theory. If you want me to pass upon a rail- 
way prospectus running some three or four hundred miles 
into the Western States, with but a few minutes' thought 
on the subject, I will not attempt to answer such a ques- 



NEBRASKA RAILROAD RATES 179 

tion in so short a time — certainly not until you told me 
the nature of the Western country into which you build. 

Mr. Kelley: Do you believe that it is right for the State 
Board of Transportation to adopt the policy which you 
have been arguing and shut out railroad-building in west- 
ern Nebraska? 

Mr. Dawes: You beg the question, and assume that the 
reduction of local rates in this State would decrease the 
earnings of the road. I say that that is an assumption which 
you have yet to prove, and I tell you now that my belief is 
that the next local rate agitation will be from the bond- 
holders as well as from the farmers of Nebraska — bond- 
holders who discover that the road is being operated on 
a short-sighted policy based upon the idea evidently that 
the road will prosper whether the country through which 
it runs prospers or not. 

Secretary Allen: Do I understand you to say that it is 
your opinion that the bondholders of the Chicago, Burling- 
ton & Quincy are dissatisfied with the earnings of the road 
at this time? 

Mr. Dawes: Very greatly, yes, sir, as well as the stock- 
holders of the road. And they are largely dissatisfied with 
the earnings, not so much because of the reduction in 
gross earnings, but because of the reduction in net earnings 
caused by increase in the fixed charges. 

Mr. Holdredge: Is there no reduction of gross earnings? 

Mr. Dawes: Yes, sir, there has been, but they attribute 
that to natural causes, and the other reduction they at- 
tribute to bad management. [Laughter.] I mean nothing 
personal at all, Mr. Holdredge. 

Auditor Benton: If there is so much complaint as you seem 
to think there is in regard to the rate question, why is it 
that some of these parties have not filed a complaint with 
this Board, as they have the right to do? During my 



180 ESSAYS AND SPEECHES 

membership of the Board in the past three years there has 
never been a complaint filed. 

Mr. Dawes: If they have had as much experience with 
railroad men in this State as I have, they know they are 
pretty sharp, well-equipped men, and they know just as 
well as I know that they will have to meet statistics drawn 
from sources to which they have no access. They know 
how it affects them likely, but what can the farmer of Ne- 
braska get up and tell you about the financial condition of 
these railroads? It is out of the question to suppose that 
the man who has a grievance at a particular place, in order 
to convince you of this grievance and obtain relief, has got 
to come up here and go into a scientific dissertation on the 
relation of the Government to railway corporations. 

Auditor Benton: He does n't have to come up here. How 
was it with the Stromsberg elevator case? It was not nec- 
essary for them to come. They simply filed a complaint 
and found relief. What do we find here to-day? Do we 
find a farmer? No, we find an attorney from Lincoln. 

Mr. Dawes: I am free to say that the members of this 
State Board of Transportation, the most of them, have 
been elected upon platforms demanding the reduction of 
local rates in this State, and it is a duty they owe the people 
which they have outrageously neglected. 

Mr. Holdredge: Where are the people? 

Mr. Dawes: I think you will find out where the people 
are, in the course of time. I tell you, gentlemen of the 
Board of Transportation, that the refusal of this Board to 
regulate rates is a refusal on their part to uphold the inter- 
ests of the people of Nebraska, and when I urge upon you 
the necessity of a reduction as against outside competing 
points, I simply urge upon you a duty as apparent as the 
sun is in daytime. If this State Board of Transportation 
will do its duty in this matter, and make its investigation 



NEBRASKA RAILROAD RATES 181 

as it ought to make it, it would be satisfied, as every in- 
vestigating man has been satisfied, that our local rates are 
too high. 

I will say to you, Mr. Auditor Benton, that it is a good 
deal better for you to make this investigation right here at 
home than it is riding in special cars to the Pacific Coast at 
the expense of the railroads. 

Auditor Benton: I guess you would ride, too, if you had 
the chance. 

Mr. Dawes: Not if I were drawing a salary as a state 
officer, and a member of the Board of Transportation and 
was paid by the people to stay at home, and protect their 
interests, and do my duty. 

Mr. Kelley : I would like to have you state to the Board 
what rule you would recommend them to adopt in the es- 
tablishment of a rate sheet for Nebraska having reference 
to the value of the road, the revenue, and the business of the 
State. 

Mr. Dawes : You know well enough when you ask that 
question that it is impossible to give a short answer to it. I 
have been trying to get started into a little statement of 
what I believe the Board of Transportation should look 
into in determining the rates of Nebraska as regards the 
revenue of the road and the cost of the road. As I stated 
before, I believe that the dividing of the net earnings of the 
road per mile by the cost per mile gives a result which is 
arbitrary and which does not measure the profits even on 
the watered stock of the railroad company. I hold that a 
local rate reduction involves these questions: What has 
the stock cost which will be affected by the reduction, and 
what, then, is the ratio of stock earnings to stock cost? 
Will a local rate reduction such as will do justice to in- 
terior Nebraska reduce stock earnings to an unreasonably 
low figure? 



18a ESSAYS AND SPEECHES 

Since the bondholder receives his interest before the 
stockholder receives his dividend, the bondholder is not 
primarily affected by a reduction, and the relation of the 
stock cost to stock earnings is the true basis of investiga- 
tion and argument. 

Attorney-General Hastings : What do you mean by "stock 
cost"? 

Mr. Dawes : It is what the stockholders put into the road. 
I am not here to say that they should earn only 8 or 9 or 10 
per cent, or even more on stock cost, but they earn, as I 
think I showed last winter, considering the years 1883 to 
1889 inclusive, about 22 per cent annually on the intrinsic 
value of the stock. I think I showed that the Chicago, 
Burlington & Quincy Railway, at least, could justly stand 
a reduction in local rates, admitting, merely for the sake of 
argument, that reduced rates mean reduced net earnings. 

Mr. Holdredge : I beg your pardon, you did not show it. 

Mr. Dawes: I have your corrections that you sent to 
Professor Warner and which were published in the "Politi- 
cal Science Quarterly" for March. If the mistake alleged to 
have been made is the one you endeavored to point out to 
the Professor, I will answer it. In the written report which 
the Chicago, Burlington & Quincy Railroad Company 
made to the State Board of Transportation they make this 
statement : That on the road in Nebraska there is outstand- 
ing $40,515,830.82 in first mortgage bonds. That is the 
statement you make in writing here to the State Board of 
Transportation. You have realized in cash proceeds from 
the sale of United States and state land grants $8,452,- 
203.01, and from the sale of donated municipal and county 
bonds, $2,372,800; these three sums added together amount 
to $51,340,833.83. In Mr. Holdredge's sworn statement to 
the Board of Transportation — it may not be over Mr. 
Holdredge's signature, but it is the sworn statement made 



NEBRASKA RAILROAD RATES 183 

by the Chicago, Burlington & Quincy Railroad Company, 
— he gives the cost of the Chicago, Burlington & Quincy 
road in Nebraska, including cost of shops, betterments, 
and the largest part of the equipment at $50,010,263.66, 
which is over $1,300,000 less than the company received 
from the sale of first mortgage bonds, land grants and 
municipal bonds. 

Now, let me give you the results I have reached from a 
careful study of the reports of the Chicago, Burlington & 
Quincy Railway, in Nebraska. [Reading.] Taking the year 
1887, which is a fair average year for earnings, considering 
the years 1883 to 1890, inclusive, and the earnings upon 
the intrinsic value of the stock amounted to $1,341.45 per 
mile of Nebraska road, after bond interest had been paid. 
This intrinsic value of stock is found by pro-rating the land 
grants and municipal bonds on the mileage in 1887, and 
amounts to $6075 per mile, on which sum these earnings of 
$1341.45 per mile amounts to 22 per cent per annum. 

Auditor Benton: Do you mean to say that the road cost 
but $6000 and something per mile? 

Mr. Dawes: No, sir ; but taking out that part of cost paid 
in from the proceeds of the sale of the first mortgage bonds 
it left still $6075, the amount paid in, in one sense, by the 
stockholders. They did not actually pay it in, but they got 
it out of the sale of donated land grants and municipal 
bonds which were given them through the generosity of the 
people of Nebraska. 

Mr. Holdredge: Did Nebraska give the $8,000,000 in 
United States land grants? 

Mr. Dawes: No, sir; these Nebraska people, and the 
United States together; the people of the United States 
gave a portion of it, and the people of the State gave the 
other, but the people gave it — not the stockholders. The 
question is simply this : Where do the equities lie as between 



184 ESSAYS AND SPEECHES 

the people who now hold that stock and the people of the 
State of Nebraska? In the New York "Post" of April 22, 
along with a very extended criticism of this very policy of 
the Chicago, Burlington & Quincy Railroad, in running out 
its unproductive lines here, some gentleman, in answer to 
the argument I made before the Senate Committee on 
Railroads, goes to work and gives the number of women, 
the number of trustees for eleemosynary institutions, and 
guardians for minors, who own stock in the road, and then, 
admitting for the sake of argument that my figures are 
correct, maintains that these innocent stockholders have an 
equitable right to insist upon the maintenance of present 
freight charges if necessary to give them dividends upon the 
cost of the stock to them. I deny that the maintenance 
of the freight charges is necessary to keep the earnings of 
the road up, and claim that the building-up of local busi- 
ness under equitable rates will increase their dividends. 

Yet I maintain, as between their equities and the equities 
of Nebraska citizens who have given such generous dona- 
tions to these railroads, that the equities of the people of this 
State are greater than the equities of these stockholders. 
And I tell you, the moment you assume that, by dividing 
the net earnings of the road by the cost of the road, you are 
going to get the measure of profits of the road, you put 
yourself from the proper consideration of this subject. 

Auditor Benton: According to your argument, you main- 
tain that the road cost them nothing? 

Mr. Dawes.: I maintain very nearly that thing. Of course, 
these things can never be arrived at exactly unless we have 
the full set of reports from the date of the organization to 
the present day. I have shown that from 1885 not a cent 
has been received from the stockholders for building the 
road, but that the cost of building the extension has been 
derived wholly from the sale of first mortgage bonds. Now, 



NEBRASKA RAILROAD RATES 185 

considering the road as it existed prior to December 31, 
1885, and taking the amount of bonds issued on that, and 
adding in the municipal and county bonds and the land 
grant, you have more than their sworn cost per mile of 
road in Nebraska. 

I guess that will be all that I have to say on this question, 
but if this Board contemplates the reduction of the local 
rates, I ask that you consider the local rates with reference 
to the rates from outside points to the State of Nebraska, 
and in some way lower the rates so that these injustices 
which I have mentioned may be righted, and so that, how- 
ever small the shipments may be at first, interior Nebraska 
in the home markets of the State may have a fair chance as 
against outside competing points. 



THE OUTLOOK FOR CURRENCY REFORM 

{The Forum, October, 1899) 

After several years of discussion by the public and 
by congressional committees, the currency question in the 
next session of Congress will be considered, for the first 
time during this Administration, by a House and Senate 
both controlled by the Republican Party, which, in 1896, 
declared itself for sound governmental money and the 
gold standard. 

The time which has elapsed between the election of 1896 
and the control of the United States Senate by the Re- 
publicans enables that party to approach the solution of 
the problem with a greater unanimity of opinion than has 
been possible heretofore. Prior to the year 1893 it had not 
been generally recognized by our people that our present 
monetary system had an inherent weakness, the develop- 
ment of which was dependent only upon a commercial 
panic and deficient governmental revenues. The panic of 
that year and concurrent revenue deficiency furnished the 
needed demonstration of the existing defect. The two chief 
causes of this weakness were as follows : First, the dispro- 
portion existing between demand governmental currency 
liabilities and the gold in the Treasury with which to re- 
deem them; and second, the fact that when these demand 
liabilities were once redeemed in gold, they could be used 
again in the payment of governmental expenses. This 
latter fact was responsible for what was known as the 
"endless chain"; for the public, coming again into the pos- 
session of these demand currency liabilities, again called 
for their redemption in gold. 



OUTLOOK FOR CURRENCY REFORM 187 

It was dissatisfaction with this condition of affairs, 
rather than with our present system of banking and bank 
currency, which found expression in the popular discussions 
of sound money prior to the election of 1896. Immediately 
after the election several radical, and somewhat experi- 
mental, plans of currency reform were earnestly pressed 
upon the attention of the country by certain students of 
finance, and, for a time, received general discussion and 
consideration. These plans provided in effect for the as- 
sumption, by the national banks of the country, of the 
burden of the gold redemption of outstanding govern- 
mental currency obligations, in return for the privilege of 
issuing their own notes to fill the vacuum caused by the 
eventual retirement of these currency obligations. These 
bank-notes were to depend for their chief security on a 
first lien upon the commercial assets of the issuing banks, 
and were not to be protected by a trust deposit of govern- 
ment bonds as security, as under our present system. 

Matured discussion, however, revealed the fact that 
agreement upon any one of those plans, differing as they 
did in fundamental particulars, was impossible even among 
those who believed in the principles underlying them; and 
they did not seem to be received with favor by the general 
public. 

In his first message to Congress the President of the 
United States, recognizing the causes of the existing dan- 
gers to our currency system, made a recommendation 
designed to correct these evils rather than to introduce 
marked changes in the system. His recommendation was 
as follows : — 

That when any of the United States notes are presented for re- 
demption in gold, and are redeemed in gold, such notes shall be 
kept and set apart, and only paid out in exchange for gold. This 
is an obvious duty. 



188 ESSAYS AND SPEECHES 

At the time of his second annual message to Congress 
the financial operations of the Treasury — incident to the 
Spanish War and the growing confidence of the public in 
the stability of the gold standard, which led them freely to 
deposit gold in the Treasury in exchange for notes — had 
lessened the disproportion between the demand-currency 
liabilities of the Government and the gold in the Treasury 
to redeem them. For the accomplishment of this result 
surplus governmental revenues, at the time of the Presi- 
dent's former message, had seemed essential; and after 
pointing out, therefore, in his message, that the proportion 
of net gold holdings to demand-currency liabilities of the 
Treasury, November 1, 1898, was 25.35 per cent as com- 
pared with 16.96 per cent on November 1, 1897, he made a 
recommendation which marked an advance upon the one 
of his former message. This advance was made possible by 
the improvement in the condition of the Treasury. He 
states : — 

In my judgment the present condition of the Treasury amply 
justifies the immediate enactment of the legislation recommended 
one year ago under which a portion of the gold holdings should be 
placed in a trust fund, from which greenbacks should be redeemed 
upon presentation, but when once redeemed should not thereafter 
be paid out except for gold. 

This plan of the President has commended itself, during 
the past year, to the best judgment of a constantly increas- 
ing number, until there now seems to be an almost unani- 
mous consensus of opinion among the friends of sound 
money that it will properly be the foundation of the coming 
legislative reform of the currency. If Congress does noth- 
ing more than enact a law declaring the standard to be gold, 
and providing for its security and safety by this plan of the 
President, it will have carried into effect one of the greatest 
financial reforms of our history. 



OUTLOOK FOR CURRENCY REFORM 189 

The importance of the separation of the gold reserve, 
which is the foundation of our currency, from the general 
fund of the Treasury is clearly indicated by the following 
statement of the Treasury conditions preceding the first 
sale of government bonds to replenish the gold reserve in 
February, 1894. It is to be remembered, in connection 
with this statement, that the gold paid into the New York 
Clearing-House was in settlement of the balance against 
the Government, and to be attributed to the excess of 
governmental expenditures over receipts. 











Gold paid into 


Month 


Net cash balance 


Net gold in 
Treasury 


Notes redeemed 
in gold 


New York 
Clearing- 
House 


1893 — 










January 


$125,265,067 


$108,181,713 


$11,496,617 


— 


February- 


124,126,089 


103,284,219 


13,828,664 


— ■ 


March 


125,630,728 


106,892,224 


4,926,453 


— 


April 


121,482,903 


97,011,330 


20,051,910 


— 


May 


121,565,155 


95,048,641 


16,547,849 


— 


June 


122,462,290 


95,485,414 


4,250,651 


— 


July 


117,887,566 


99,202,933 


1,036,015 


$4,940,000 


August 


107,283,910 


96,009,123 


2,348,222 


2,475,000 


September 


106,875,632 


93,582,172 


340,727 


15,395,000 


October 


102,294,291 


84,384,863 


695,392 


27,645,000 


November 


95,199,616 


82,959,049 


516,372 


15,150,000 


December 


90,375,555 


80,891,600 


517,418 


13,570,000 


1894 — 










January 


84,082,098 


65,650,175 


356,356 


19,015,000 



From this statement it will be noted that the gold re- 
serve in April, 1893, was reduced below the $100,000,000 
limit, which has, for various reasons, come to be considered, 
both by the public mind and in Treasury circles, as the 
minimum amount to which the reserve can fall consistent 
with the safety of our currency system. It will be noted, 
also, that between this date and February, 1894, at which 
time bonds were sold to replenish the gold reserve, there 



190 ESSAYS AND SPEECHES 

had been gold disbursements from the Treasury for govern- 
ment expenses of $98,190,000, as compared with gold re- 
demptions of currency obligations, during the same period, 
of $46,660,912. In other words, the first sale of bonds to 
replenish the gold reserve was due more to deficient gov- 
ernmental revenues than to the demand for redemption in 
gold of currency liabilities. During that period the whole 
financial and business community kept its eye on the 
dwindling reserve, upon whose condition depended the in- 
tegrity of our monetary system, and which was being con- 
stantly drawn upon, not simply for its primary purpose of 
redeeming notes, but under the pressure of deficient reve- 
nues for governmental expenses as well. The public mind 
was again impressed with the acuteness of the situation by 
the first sale of government bonds to replenish the reserves, 
which called additional attention to the disproportion ex- 
isting between the reserve and currency obligations; thus 
stimulating the additional demand for redemption which 
afterward occurred. 

With the trust fund recommended by the President in 
existence, a deficiency in governmental revenues cannot eat 
away the foundation of our national currency; though it is 
true that when governmental revenues are deficient, noth- 
ing can relieve the Government of the necessity of borrow- 
ing, unless revenues are increased by changed industrial 
conditions or new legislation. The passing into law of the 
President's recommendation cannot alter that fact. But it 
will have the effect of emphasizing the necessity of main- 
taining, by proper revenue laws, a closer relation between 
the current revenues and expenses of Government, and 
of preventing the loss of credit to our monetary system, 
resulting from borrowing for expenses the reserve which 
should be pledged to the specific purpose of protecting the 
currency. 



OUTLOOK FOR CURRENCY REFORM 191 

The practical effect of the inability of the Secretary of 
the Treasury to use the trust gold fund for current expen- 
ditures will be to require the speedier adjustment by Con- 
gress of revenue laws to meet a given emergency. When 
this trust fund is in existence, if borrowing becomes nec- 
essary, before proper revenue legislation can be had, the 
Government will borrow money under more favorable con- 
ditions than heretofore. When the Government concur- 
rently borrows not only money to pay expenses, but gold 
to protect its currency, its credit is subjected to the sever- 
est strain, as evidenced by the high rates of interest paid 
on the governmental loans following the year 1893, when 
it was reduced to this situation. 

The Government may be reduced to this extremity here- 
after, even with this fund in existence; but the likelihood is 
made much more remote. After this fund has been estab- 
lished, the preservation of the gold standard by the direct 
act of the President and the Secretary of the Treasury, 
which we witnessed several times during the years from 
1893 to 1896, would not be absolutely necessary until the 
fund should have been exhausted by the redemption from 
it of an equal amount of currency. Its replenishment 
would then be necessary, either from surplus revenues 
or from borrowing. At present the gold in the Treasury 
can be drawn on, both for currency redemption and for 
government expenses; and, under the laws of trade, 
these demands are almost sure to be made at the same 
time. 

A great merit of the President's recommendation is its 
simplicity. The people understand it. They understand 
that it cannot result in contraction of the currency; for 
gold must come out of the fund into circulation when a 
greenback goes in. They see in it a relief from the "endless 
chain," which has caused such trouble heretofore, and a safe 



192 ESSAYS AND SPEECHES 

protection to the gold standard, which forms the present 
basis of business. 

The chief steps in currency reform which the friends of 
sound money hope for and expect from the next Congress 
are: (1) The declaration for the gold standard; and (2) the 
enactment of this Presidential recommendation. The lat- 
ter, while it does not involve a change in the currency now 
in circulation, provides for its safety; so that if a panic does 
occur again, it will not be because of distrust in the Gov- 
ernment's currency, nor will it be able materially to injure 
the credit of that currency. 



THE RUFUS F. DAWES HOTEL 

{Chicago Tribune, December 13, 1914) 
The purpose of the Rufus F. Dawes Hotel, as operated 
by Mr. Henry M. Dawes and myself, is to provide men with 
accommodations at reasonable figures. It is no different 
from any other hotel except that its charges are lower. 

It assumes that its guests are gentlemen and apprecia- 
tive of gentlemanly treatment. The fact that in the opera- 
tion of the hotel a small deficit results is not made the excuse 
by the management for any different treatment of guests 
than is customary in other first-class hotels. However sym- 
pathetic with religious, educational, and charitable work I 
might be, — and I am so, — if I went as a paying guest to a 
first-class hotel and found the management solicitous as to 
my mental state, religious beliefs, or daily occupation, and 
insisting upon my listening to unsolicited advice or religious 
or educational addresses, I would regard it as an insult and 
as an assumption of inferiority on my part and superiority 
on theirs unjustified by the nature of our relationship. 

Accordingly, the Rufus F. Dawes Hotel management, 
proceeding on the idea that its guests are not to be con- 
sidered as a class or a species, or anything but American 
citizens, has succeeded beyond our best expectations. In- 
stead of a deficit of eight or ten thousand dollars per year as 
we expected, the deficit for the first year's operation, when 
about 179,000 men were lodged and 59,000 fed, and em- 
ployment found for 1570, amounts to only $1800, includ- 
ing a liberal estimated depreciation, at the rate of one cent 
per man. This does not include, of course, any return on 
the cost of the hotel which was erected in my son's memory. 



194 ESSAYS AND SPEECHES 

There are no rules in the hotel different from any other 
first-class hotel save those relating to sanitation. I make 
the assertion that there is no hotel in the country, accom- 
modating anything like an equal number of guests, that has 
as little trouble with its patrons as ourselves. In fact, we 
have no trouble at all. 



INVESTIGATIONS AND RECOMMENDA- 
TIONS RELATIVE TO BANK-NOTE 
CURRENCY 

(From Report as Comptroller of the Currency, 1898) 

Section 333 of the Revised Statutes of the United 
States provides that the Comptroller of the Currency in 
his annual report to Congress shall suggest "any amend- 
ment to the laws relative to banking by which the system 
may be improved and the security of the holders of its notes 
and other credits may be increased." 

In suggesting some general amendments to the National 
Banking Law at this time, it is not the purpose of the 
Comptroller to review in detail the plans and propositions 
for the modification of our currency and banking systems 
which are now, and for some time have been, the subject of 
economic and general discussion throughout the country; 
but a reference to them and to the principles underlying 
them is deemed imperative in view of the fact that in then- 
present form they seem to ignore the interests of bank de- 
positors, with whose protection the Comptroller is particu- 
larly charged. 

The panic of 1893 having directed attention toward the 
dangers to the general commercial system, resulting from 
the disproportion between demand currency liabilities of 
the Government, payable in gold, and the gold held in re- 
serve by the Government for their redemption, as well as 
to the inelasticity of the present bank-note currency, the 
plans providing for a modification of the banking and cur- 
rency systems which are now most discussed, may be con- 
sidered as based upon the following propositions : — 



196 ESSAYS AND SPEECHES 

First. That the disproportion between outstanding cur- 
rency liabilities of the Government payable in gold, and 
the gold held for their redemption, should be lessened by a 
contraction in the amount of the demand-currency liabili- 
ties. 

Second. That the void in circulation, caused by such 
contraction, should be filled by an extension of the circula- 
tion of national banks, which circulation, redeemable in 
gold, is ultimately to depend for its chief security upon a 
first lien on the commercial assets of the issuing banks. 

The more prominent of these plans, which may be con- 
sidered as embodying in the ablest forms the general prin- 
ciples necessarily involved in a system of bank-note issues 
secured by the general assets of banks, look to the ultimate 
displacement of government-credit money with bank-credit 
money, the latter eventually being secured by a first lien 
upon the assets of the issuing banks, and by a five per cent 
redemption fund created in the first instance by taxation 
upon solvent issuing banks and thus maintained. 

Upon any deficiency occurring in such contribution to 
the guaranty fund, due to a failure to collect from the assets 
of the insolvent bank a sufficient amount to redeem its 
notes in full, resort is to be had to additional taxation upon 
solvent banks issuing circulation to supply the deficiency, 
one plan providing, however, that such tax shall not exceed 
one per cent on the amount of their note issues per year. 

The assumptions which seem to underlie these plans are : 

First. That unless we are to have a currency contrac- 
tion, some radical extension of bank-note issues is abso- 
lutely necessary to the securing of the proper adjustment 
of government-currency liabilities to its gold reserve, by 
which adjustment the greater safety of the gold standard is 
subserved; and — 

Second. That through this radical extension and change 



BANK-NOTE CURRENCY 197 

in the present form of bank-note issues alone is elasticity 
to be secured in our currency. 

As opposed to these propositions, and in connection with 
the data given and views expressed hereinafter, relative to 
changes in the present banking laws, the Comptroller de- 
sires to state that his suggestions are based upon the follow- 
ing assumptions : — 

First. That there is existing no such condition of the 
United States finances, revenues, or credit as to justify the 
proposition that the shifting of the burden of gold redemp- 
tion of outstanding currency from the Government to the 
banks is so important as to necessitate of itself radical 
changes and concessions in national banking laws relative 
to the issue of notes, which changes and concessions would 
not be considered wise if the interests of the community, 
irrespective of government finances, were alone considered. 

Second. That if, from considerations of general public 
policy, irrespective of governmental finances, bank-note 
issues secured only by commercial assets of banks seem 
unwise, the resources, credit, and financial condition of the 
United States are such that, by means of revenue laws and 
other amendments to law suggested by the President in his 
last annual message, a safer ratio between its outstanding 
circulation and gold reserve can be attained, the stability of 
the present gold standard insured, and the currency main- 
tained upon a sound basis without contraction. 

It must be remembered, in connection with the discus- 
sion of changes in the present banking laws, that by far the 
most important function of the national banks is that of an 
acting middleman between the depositors and borrowers 
of a community, and that its note-issuing functions are 
secondary in importance and usefulness under the present 
or any proposed system of bank-note issues. 

It is especially important, therefore, in proposing changes 



198 ESSAYS AND SPEECHES 

in the laws governing the note-issuing powers of national 
banks, that the effects of such changes upon the relation 
of the bank to its depositors and borrowers be carefully 
studied. 

It is the belief of the Comptroller that the proposed pref- 
erence of the note-holder over the depositor, which is a 
fundamental basis of all these plans, is not only inherently 
wrong and unjustified by any grounds of public policy, but 
that its practical effect upon the present relation of deposi- 
tors to banks in the smaller communities of the United 
States would be so revolutionary as to bring about the 
most injurious conditions in the general business of the 
country. 1 

The essential similarity between the liability of a solvent 
bank, expressed by a deposit credit and by a bank-note, is 
generally recognized and emphasized by those advocating 
these plans. 

In view of this recognized similarity before the insol- 
vency of a bank, the radical dissimilarity in their respective 
treatment when insolvency occurs is justified by a course 
of reasoning which is believed to be fallacious. 

It may be as sound in principle for a bank to issue bank- 
notes as to take deposits, when the two classes of creditors 
stand upon the same basis in relation to the assets of the 
bank to which they have each contributed, but it is not as 
sound in principle when, in case of insolvency, the creditor 
who claims under a note must be paid in full, before the 
creditor who claims under a deposit can receive anything. 

Under these plans the dollar of the depositor, and the 
dollar of the note-holder, side by side, would be invested by 

1 For further explanation of the difference between the "first lien" 
provided for in the present law authorizing the issue of bond-secured 
national bank-note circulation and the "first lien" suggested by "asset- 
currency" advocates, see pp. 305-307. 



BANK-NOTE CURRENCY 199 

the officers in the assets of the solvent bank, since it is pro- 
posed to change the law under which at the present time 
the note-holder's dollar from the first must be invested in 
government bonds, to be held separately in trust for his 
protection. 

Side by side, these dollars of depositors and note-holders 
would be redeemed on demand without question by the 
solvent banks under the proposed system. Why, then, 
should the dollar claim of the depositor be paid nothing out 
of the assets of an insolvent bank until and unless the dollar 
claim of the note-holder is paid in full? 

In our judgment there is no relevant answer to this prop- 
osition save one, based upon grounds of general public 
policy, which admits the injustice to the depositor class, 
but justifies it by claiming the necessity, for the Govern- 
ment and the community, of additional and different circu- 
lation than that we have at present. 

The claim that a difference so radical and fundamental 
as this in the treatment of two classes of creditors can be 
justified by the fact that the depositor generally deals di- 
rectly with the bank and has the opportunity to inform 
himself as to the trustworthiness of it, whereas the notes 
are issued for general circulation and pass into the hands 
of those distant from the bank, and therefore unable to 
form an opinion as to its strength, is not one which will 
commend itself generally to practical men. 

Experience demonstrates that in the banking business 
the detection of untrustworthiness in banks is, as a matter 
of fact, not one of the duties with which the depositor, as a 
general rule, charges himself. He has come to leave that to 
the officials of the National and State Governments; and 
while it may be true that as a class he ought to exercise 
greater discretion in his selection of banks for his deposits, 
it is equally true that as a class he has come to have that 



200 ESSAYS AND SPEECHES 

confidence in the system which has made him compara- 
tively indifferent under normal conditions to this duty. 

Again, he is often compelled, by the very nature of his 
business, to be dependent upon the agency of banks at a 
distance in handling his funds, in which case he, like the 
note-holder, could not investigate if he so desired. 

Certainly the fundamental right to prefer, in the distribu- 
tion of the assets of an insolvent bank, the note-holding 
class to the depositor class, should rest upon some broader 
ground than the assumed neglect of the depositor class to 
acquaint itself with the nature of the private business 
and internal management of banking institutions, whose 
proper supervision the National Government, as the repre- 
sentative of the depositors and the public, has taken upon 
itself. 

The lien given to the note-holder under the present sys- 
tem, first upon the government bonds deposited expressly 
in trust as security for said notes, before other assets of the 
bank can be reached, is far different in practical effect from 
the general and unqualified priority in lien upon the assets 
of a bank proposed in these plans. 

The priority of lien of the note-holders under the present 
system over the depositor is first upon the United States 
bonds deposited in trust for his benefit, and only second- 
arily, in case of deficiency in bonded security, upon the 
general assets of the bank. In practical operation this secu- 
rity gives the notes the unquestioned credit necessary to en- 
able them to circulate, and at the same time does not, as a 
matter of fact, interfere with the rights of the depositor in 
case of insolvency, since the bonds at public sale bring the 
amount of the notes, and return to the insolvent bank for 
the benefit of general creditors practically all the equity 
originally invested in them. 

This being the practical effect of the present bank-note 



BANK-NOTE CURRENCY 201 

system, it cannot rightfully be considered as justifying any 
assumption that in its theory the rights of note-holders 
are considered as more sacred in themselves than the rights 
of depositors. 

Under the present system the relation of the note issues 
of a national bank to its general business is somewhat the 
same as the relation of the issue and redemption depart- 
ment of the Bank of England to its commercial depart- 
ment. They are in reality almost entirely separate, and so 
intended to be. If under any new system the note-holder 
and the deposit-holder come into similar relations to the 
bank, their rights against the common assets, to which their 
money has alike contributed, should be equally sacred. 

If, then, there is no inherent moral right to establish a 
preference of the note-holding creditors of an insolvent 
bank, as against the deposit-holding creditors, in the dis- 
tribution of the assets of an insolvent bank, the question 
arises: does public policy demand, in the interest of the 
common good, that such a preference should be given in 
order to establish a bank-note system which will give banks 
such a profit that to secure it they will relieve the United 
States Treasury of the burden of gold redemption, and 
afford the country a circulating medium having alleged 
advantages over that now in use? 

In order to determine this question, actual data at com- 
mand must be examined critically in order to understand 
the nature and extent of the wrong done the depositor class 
by this preference, and the consequent effects of this wrong 
upon the community at large and its business. 

Statistics have been quoted to show that the burdens 
which will be imposed upon depositors by such a prefer- 
ence will be light; but the force of these figures, so far as 
their being a guide to the probable economic effect of the 
proposed laws is concerned, is immediately lost when it is 



202 ESSAYS AND SPEECHES 

noted that in them no distinction is made between the rate 
of loss of depositors in different communities, and between 
the rate of loss of the depositor in the small banks and that 
of the depositor in large banks. They err in assuming that 
the percentage of loss will be ratably distributed. 

The Comptroller presents herewith a series of tables 
which indicate more exactly upon what class of depositors 
the real burden of this preference will fall with almost crush- 
ing weight. These tables give approximately the loss which 
under the proposed plan would result to depositors from 
the preference of note-holders over deposit-holders in case 
of insolvency, based upon the showing made by the 195 
insolvent national banks whose affairs have been finally 
closed during the existence of the system. 

For the purpose of these tables it is assumed, in the case 
of each class of insolvent banks, that their officers would 
have made the same proportionate losses upon the com- 
mercial assets in which the notes issued were invested that 
they actually did upon the assets in which the deposits and 
capital of the banks were invested. To the good assets of 
these different classes of insolvent national banks, as shown 
by the records of this office, has been added the amount 
which would have been realized from the unsecured notes 
issued, if loaned or invested with the same rate of loss as 
was made upon the money invested in the actual assets. 

From the assets, thus increased, there is subtracted 95 
per cent of the preferred note issues proposed, to wit, the 
par of the notes less the 5 per cent redemption fund held 
by the Government, which leaves the amount which would 
then go to the depositors and other unsecured creditors. 
This amount, in terms of percentage of their total claims, 
is then compared with the percentage of their claims actu- 
ally received, and the loss which would be caused by the 
preference is thus approximately disclosed in the difference. 



BANK-NOTE CURRENCY 203 

The tables give these results bearing upon the interests 
of depositors in banks according to geographical sections, 
and according to the following classifications of capital: 
$50,000, $100,000, $200,000, $300,000, $500,000, and banks 
with a capital exceeding $500,000. 

As under the proposed plans circulation, eventually se- 
cured only by bank assets, might be taken out in different 
amounts, these amounts have been assumed to be 60 per 
cent, 80 per cent, and 100 per cent of the capital of the 
bank, showing what the loss to depositors would approxi- 
mately be in each of these instances. 

As illustrating the method of preparing the tables, we 
will take the case of a bank of $100,000 capital which has 
failed, and upon final liquidation has paid its depositors 
50 per cent upon claims of $200,000, to wit, the sum of 
$100,000. Under the plan proposed assume this bank had 
issued in notes, secured by a first lien upon its assets, an 
amount equal to 60 per cent of its capital, to wit, the sum 
of $60,000. 

Since, in investing $300,000, to wit, $100,000 capital and 
$200,000 deposits, it has lost the sum of $200,000 and has 
remaining but $100,000, to wit, one third of its original as- 
sets, we assume that of the $57,000 circulation which the 
bank had to invest in commercial assets, to wit, the $60,000 
circulation less $3000, representing the 5 per cent redemp- 
tion fund held by the Government, it would have lost the 
same proportion, and have left of that investment but one 
third in good assets, to wit, $19,000. We add, therefore, to 
the $100,000 actually paid depositors the sum of $19,000, 
giving $119,000 for distribution between depositors and 
note-holders. But, as under these plans, the note-holders 
are preferred for the full amount of their $60,000 notes, of 
which but $3000 is in the redemption fund, there must be 
subtracted from this $119,000 the sum of $57,000, leaving 



204 ESSAYS AND SPEECHES 

for the depositors only $62,000, as against $100,000 which 
they received under the present system, without any bur- 
den of note preferences upon common assets. As $62,000 
is but 31 per cent of their total claims of $200,000, upon 
which under the present system they receive $100,000 divi- 
dends, or 50 per cent, it follows that their loss, directly 
traceable to the preference, would amount to 19 per cent of 
the face of their deposits. 

Of necessity these tables, based as they are upon hy- 
pothesis, can be considered only as approximately indicat- 
ing the losses which depositors may expect; but that they 
furnish a conservative estimate of these losses is believed. 
They do not take into consideration the possibility of un- 
usual losses in general bank assets, through an inflation of 
the currency and resultant speculation brought about by 
an abnormal increase in the number of national banks. 
This increase might be caused by private and state banks 
and trust companies entering the system for the sake of the 
profits arising from the currency privilege. These plans 
provide for a circulation secured by the commercial assets 
of banks up to a limit of 100 per cent of the capital of the 
bank, with an increasing tax as the limit is reached. In this 
connection it is well to remember that an insolvent bank, as 
a general rule, will have made every effort before closing its 
doors to avail itself of the currency privilege to the full limit 
allowed by law in the effort to avert suspension of payments. 

Of the 195 national banks which have been finally liqui- 
dated, these tables show in reference to the rate of loss 
experienced in investments: — 

That 10 banks in the New England States, with com- 
bined capital of $2,571,300, have paid cash dividends of 
$9,626,055 on $11,508,426 of claims proved, or 83.64 per 
cent. These banks had total nominal assets of $17,195,440, 
of which $10,207,324 were collected in cash or by offsets or 



BANK-NOTE CURRENCY 205 

otherwise, making the proportion of valuable assets to 
nominal assets, upon final liquidation, 59.36 per cent. 

That 50 banks in the Eastern States, with a combined 
capital of $9,155,600, have paid cash dividends of $14,469,- 
195 on $18,399,239 of claims proved, or 78.64 per cent. 
These banks had total nominal assets of $31,135,897, of 
which $17,260,498 were collected in cash or by offsets or 
otherwise, making the proportion of valuable assets to 
nominal assets, upon final liquidation, 55.44 per cent. 

That 33 banks in the Southern States, with a combined 
capital of $4,775,000, have paid cash dividends of $6,611,- 
266 on $10,111,715 of claims proved, or 65.38 per cent. 
These banks had total nominal assets of $15,263,365, of 
which $6,808,364 were collected in cash or by offsets or 
otherwise, making the proportion of valuable assets to 
nominal assets, upon final liquidation, 44.61 per cent. 

That 44 banks in the Middle States, with a combined 
capital of $9,122,000, have paid cash dividends of $7,996,- 
983 on $11,167,256 of claims proved, or 71.61 per cent. 
These banks had total nominal assets of $24,153,212, of 
which $11,796,392 were collected in cash or by offsets or 
otherwise, making the proportion of valuable assets to 
nominal assets, upon final liquidation, 48.84 per cent. 

That 44 banks in the Western States, with a combined 
capital of $3,382,000 have paid cash dividends of $2,195,- 
061 on $3,552,511 of claims proved, or 61.79 per cent. 
These banks had total nominal assets of $9,308,471, of 
which $3,083,292 were collected in cash or by offsets or 
otherwise, making the proportion of valuable assets to 
nominal assets, upon final liquidation, 33.12 per cent. 

That 14 banks in the Pacific States, with a combined 
capital of $1,725,000, have paid cash dividends of $1,644,- 
705 on $2,628,811 of claims proved, or 62.56 per cent. 
These banks had total nominal assets of $5,687,777, of 



206 ESSAYS AND SPEECHES 

which $2,538,605 were collected in cash or by offsets or 
otherwise, making the proportion of valuable assets to 
nominal assets, upon final liquidation, 44.63 per cent. 

That the total of 195 banks, with a combined capital of 
$30,730,900, have paid cash dividends of $42,543,265 on 
$57,367,958 of claims proved, or 74.16 per cent. These 
banks had total nominal assets of $102,744,162, of which 
$51,694,475 were collected in cash or by offsets or other- 
wise, making the proportion of valuable assets to nominal 
assets, upon final liquidation, 50.31 per cent. 

Of the 195 national banks which have been finally liqui- 
dated, these tables further show in reference to the rate of 
loss experienced in investments : — 

That 66 banks of $50,000 capital each, and total capital 
of $3,280,000, have paid cash dividends of $2,859,618 on 
$4,424,178 of claims proved, or 64.64 per cent. These banks 
had total nominal assets of $8,733,255, of which $7,584,130 
were collected in cash or by offsets or otherwise, making 
the proportion of valuable assets to nominal assets, upon 
final liquidation, 39.68 per cent. 

That 61 banks of $100,000 capital each, and total capi- 
tal of $5,634,000, have paid cash dividends of $6,262,487 
on $9,891,367 of claims proved, or 63.31 per cent. These 
banks had total nominal assets of $18,034,198, of which 
$7,584,130 were collected in cash or by offsets or otherwise, 
making the proportion of valuable assets to nominal assets, 
upon final liquidation, 42.05 per cent. 

That a total of the above 127 banks, having a combined 
capital of $8,914,000, have paid cash dividends of $9,122,- 
105 on $14,315,545 of claims proved, or 63.72 per cent. 
These banks had total nominal assets of $26,767,453, of 
which $11,049,464 were collected in cash or by offsets or 
otherwise, making the proportion of valuable assets to 
nominal assets, upon final liquidation, 41.28 per cent. 



BANK-NOTE CURRENCY 207 

That 37 banks of $200,000 capital each, and total capital 
of $6,355,600, have paid cash dividends of $7,321,036 on 
$9,211,748 of claims proved or 79.47 per cent. These banks 
had total nominal assets of $17,748,526, of which $7,895,- 
311 were collected in cash or by offsets or otherwise, mak- 
ing the proportion of valuable assets to nominal assets, 
upon final liquidation, 44.48 per cent. 

That 16 banks of $300,000 capital each, and total capi- 
tal of $4,350,000, have paid cash dividends of $6,866,897 
on $9,042,532 of claims proved, or 75.94 per cent. These 
banks had total nominal assets of $16,369,761, of which 
$8,629,562 were collected in cash or by offsets or other- 
wise, making the proportion of valuable assets to nominal 
assets, upon final liquidation, 52.72 per cent. 

That 9 banks of $500,000 capital each, and total capital 
of $4,300,000, have paid cash dividends of $12,441,201 on 
$16,558,203 on claims proved, or 75.13 per cent. These 
banks had total nominal assets of $23,402,935, of which 
$15,321,625 were collected in cash or by offsets or other- 
wise, making the proportion of valuable assets to nominal 
assets, upon final liquidation, 65.47 per cent. 

That 6 banks of $500,000 capital each, or over, and 
total capital of $6,811,300, have paid cash dividends of 
$6,792,026 on $8,239,930 of claims proved, or 82.43 per cent. 
These banks had total nominal assets of $18,455,587, of 
which $8,798,513 were collected in cash or by offsets or 
otherwise, making the proportion of valuable assets to 
nominal assets, upon final liquidation, 47.67 per cent. 

That the total of 68 banks with capital of $200,000 or 
over each, and total capital of $21,816,900, have paid cash 
dividends of $33,421,160 on $43,452,413 of claims proved, 
or 77.62 per cent. These banks had total nominal assets of 
$75,976,709, of which $40,645,011 were collected in cash 
or by offsets or otherwise, making the proportion of valu- 



208 ESSAYS AND SPEECHES 

able assets to nominal assets, upon final liquidation, 53.50 
per cent. 

These tables further show that the depositors of the 10 
insolvent national banks, having a combined capital of 
$2,571,300 and nominal assets of $17,195,400, with cash 
dividends paid to depositors of $9,626,055, or 83.64 per 
cent, situated in the New England States of Maine, New 
Hampshire, Vermont, Massachusetts, Rhode Island, and 
Connecticut, would have lost by preference of the note- 
holders in case of an issue of uncovered notes equal to 100 
per cent of their capital, 8.62 per cent of their deposits more 
than under the present system, or 10.30 per cent of their 
dividends; in case of note issues of 80 per cent of their 
capital, 6.90 per cent more, or 8.25 per cent of their divi- 
dends ; and in case of circulation of 60 per cent of their capi- 
tal, 5.17 per cent more, or 6.18 per cent of their dividends. 

The depositors of 50 insolvent banks, having a com- 
bined capital of $9,155,600, nominal assets of $31,135,897, 
with cash dividends paid to depositors of $14,469,195, or 
78.74 per cent, situated in the Eastern States of New York, 
New Jersey, Pennsylvania, Delaware, Maryland, and the 
District of Columbia, would have lost by preference of the 
note-holders with a 100 per cent note issue, 21.06 per cent 
more than under the present system, or 26.78 per cent of 
their dividends; with an 80 per cent note issue, 16.85 per 
cent more, or 21.42 per cent of their dividends; and with a 
60 per cent note issue, 12.64 per cent more, or 16.07 per 
cent of their dividends. 

The depositors of 33 insolvent banks, having a combined 
capital of $4,775,000, nominal assets of $15,263,635, and 
with cash dividends paid to depositors of $6,611,266, or 
65.38 per cent, situated in the Southern States of Virginia, 
West Virginia, North Carolina, South Carolina, Georgia, 
Florida, Alabama, Mississippi, Louisiana, Arkansas, Texas, 



BANK-NOTE CURRENCY 209 

Kentucky, and Tennessee, would have lost by preference of 
the note-holders with a 100 per cent note issue, 24.85 per 
cent more than under the present system, or 38 per cent 
of their dividends; with an 80 per cent note issue, 19.88 
per cent more, or 30.41 per cent of their dividends; and 
with a 60 per cent note issue, 14.91 per cent more, or 22.80 
per cent of their dividends. 

The depositors of 44 insolvent banks, having a com- 
bined capital of $9,122,000, nominal assets of $24,153,212, 
and with cash dividends paid to depositors of $7,996,983, 
or 71.61 per cent, situated in the Middle States of Ohio, 
Indiana, Illinois, Michigan, Wisconsin, Minnesota, Iowa, 
and Missouri, would have lost by preference of the note- 
holders, with a 100 per cent note issue, 39.70 per cent more 
than under the present system, or 55.44 per cent of their 
dividends; with an 80 per cent note issue, 31.76 per cent 
more, or 44.35 per cent of their dividends; and with a 60 
per cent note issue, 28.32 per cent more, or 33.26 per cent 
of their dividends. 

The depositors of 44 insolvent banks, having a com- 
bined capital of $3,382,000, nominal assets of $9,308,471, 
and with cash dividends paid to depositors of $2,195,061, 
or 61.79 per cent, situated in the Western States of North 
Dakota, South Dakota, Nebraska, Kansas, Montana, 
Wyoming, Colorado, New Mexico, Oklahoma, and Indian 
Territory, would have lost by preference of note-holders, 
with a 100 per cent note issue, 60.49 per cent more than 
under the present system, or 97.89 per cent of their divi- 
dends (being their total dividends, except 1.30 per cent of 
par value of claim) ; with an 80 per cent note issue, 48.39 
per cent more, or 78.31 per cent of their dividends; and 
with a 60 per cent note issue, 36.29 per cent more, or 58.73 
per cent of their dividends. 

The depositors of 14 insolvent banks, having a combined 



210 ESSAYS AND SPEECHES 

capital of $1,725,000, nominal assets of $5,687,777, with 
cash dividends paid to depositors of $1,644,705, or 62.56 
per cent, situated in the Pacific States of Washington, 
Oregon, California, Idaho, Utah, Nevada, and Arizona, 
would have lost by preference of the note-holders, with a 
100 per cent note issue, 34.51 per cent more than under 
the present system, or 55.16 per cent of their dividends; 
with an 80 per cent note issue, 27.61 per cent more, or 
44.13 per cent of their dividends; with a 60 per cent 
note issue, 20.71 per cent more, or 33.10 per cent of their 
dividends. 

Thus it will be seen that, as compared with the rate of 
loss to the New England depositor, through the preference 
of the note-holders in cases of insolvency, the issues of un- 
covered notes being either 100 per cent, 80 per cent, or 60 
per cent of the capital, the depositor in the Eastern States 
will lose at a rate of nearly two and one half times as great; 
the depositor in the Southern States at a rate nearly three 
times as great ; the depositor in the Pacific States at a rate 
four times as great ; the depositor in the Middle States at a 
rate over four and one half times as great; and the almost 
obliterated depositor in the Western States at a rate over 
seven times as great. 

These tables also show that the depositors of the 66 in- 
solvent banks of $50,000 capital, having a combined capi- 
tal of $3,280,000,! nominal assets of $8,733,255, with cash 
dividends paid to depositors of $2,859,618, or 64.64 per 
cent, would have lost by preference of the note-holders, in 
case of an issue of uncovered notes equal to 100 per cent of 
the capital, 42.49 per cent more than under the present 
system, or 65.73 per cent of their dividends; in the case of 
a note issue of 80 per cent, 33.99 per cent more, or 52.58 

1 One bank of $30,000 capital included, which failed before the full 
$50,000 capital required by law had been paid. 



BANK-NOTE CURRENCY 211 

per cent of their dividends; and in case of 60 per cent note 
issues, 25.49 per cent more, or 39.43 per cent of their divi- 
dends. 

The depositors of 61 insolvent banks, with a capital of over 
$50,000 and not exceeding $100,000 aggregating $5,634,- 
000, nominal assets of $18,034,198, with cash dividends of 
$6,262,487, or 63.31 per cent, would have lost by preference 
of the note-holders, in case of an issue of uncovered notes 
equal to 100 per cent of the capital, 31.35 per cent more 
than under the present system, or 49.52 per cent of their 
dividends; and in case of note issue of 80 per cent, 25.08 
per cent more, or 39.61 per cent of their dividends; and 
in case of 60 per cent note issues, 18.81 per cent more, or 
29.71 per cent of their dividends. 

The depositors of 37 insolvent banks, with a capital of over 
$100,000 and not exceeding $200,000, aggregating $6,355,- 
600, nominal assets of $17,748,526, with cash dividends 
paid of $7,321,036, or 79.47 per cent, would have lost by 
preference of note-holders, in case of an issue of uncovered 
notes equal to 100 per cent of the capital, 36.39 per cent 
more than under the present system, or 45.79 per cent of 
their dividends; and in case of note issues of 80 per cent, 
29.11 per cent more, or 36.63 per cent of their dividends; 
and in case of 60 per cent note issues, 21.83 per cent more, 
or 27.47 per cent of their dividends. 

The depositors of 16 insolvent banks, with a capital of over 
$200,000 and not exceeding $300,000, aggregating $4,350,- 
000, nominal assets of $16,369,761, with cash dividends of 
$6,866,897, or 75.94 per cent, would have lost by preference 
of the note-holders, in case of an issue of uncovered notes 
equal to 100 per cent of the capital, 21.61 per cent more 
than under the present system, or 28.46 per cent of their 
dividends; in case of note issues of 80 per cent, 17.29 per 
cent more, or 22.77 per cent of their dividends; and in case 



212 ESSAYS AND SPEECHES 

of 60 per cent note issues, 12.96 per cent more, or 17.06 
per cent of their dividends. 

The depositors of 9 insolvent banks, with a capital of over 
$300,000, and not exceeding $500,0Q0, aggregating $4,300,- 
000, nominal assets of $23,402,935, with cash dividends of 
$12,441,201, or 75.13 per cent, would have lost by prefer- 
ence of the note-holders, in case of an issue of uncovered 
notes equal to 100 per cent of the capital, 8.51 per cent 
more than under the present system, or 11.33 per cent of 
their dividends; in case of note issues of 80 per cent, 6.81 
per cent more, or 9.06 per cent of their dividends; and in 
case of 60 per cent note issues, 5.11 per cent more, or 
6.80 per cent of their dividends. 

The depositors of 6 insolvent banks, with capital exceed- 
ing $500,000, aggregating $6,811,300, nominal assets of 
$18,455,587, with cash dividends of $6,792,026, or 82.43 
per cent, would have lost by preference of the note-holders, 
in case of an issue of uncovered notes equal to 100 per cent 
of the capital, 41.10 per cent more than under the present 
system, or 49.86 per cent of their dividends; in case of note 
issues of 80 per cent, 32.88 per cent, or 39.89 per cent of 
their dividends; and in case of 60 per cent note issues, 24.66 
per cent more, or 29.92 per cent of their dividends. 

From the tables which we have given, it is evident that 
from the depositors in smaller national banks of from 
$50,000 to $100,000 capital, and from the depositors of the 
newer sections of the country, the greater amount of the 
cost of this radical experiment in currency must be col- 
lected. Thus, upon those depositors least able to endure 
loss must the heaviest losses fall. 

The assumption of the friends of these proposed plans, 
that the uncovered currency privilege will be availed of in 
those communities where there is now an alleged scarcity 
of the circulating medium, may be correct. But this is only 



BANK-NOTE CURRENCY 213 

another statement of the fact that those banks which will 
most readily issue notes are in those communities where 
statistics show there now occurs the largest' proportion of 
bank failures. In other words, in those communities in 
which bank depositors have already sustained the greatest 
percentage of losses, they are to be subjected to still greater 
losses by having their claims against an insolvent bank 
made subject to the prior lien of note-holders. 

In cases of insolvency the records of this office show that, 
as a rule, those banks pay the smallest dividends to general 
depositors which at the time of failure have their bills re- 
ceivable largely collateraled to bills payable, which they 
have issued for borrowed money. In effect, a bank which 
would issue these notes collaterals its entire assets to its 
note issues. 

Under the laws of competition, the large city banks 
would gradually receive a larger proportion of deposits of 
the country, as the effects of the increased percentage of 
loss to depositors of smaller banks was perceived by the 
general public. The tendency to hoard money in smaller 
communities would also be stimulated. One of the pur- 
poses of the proposed laws, which is to enlarge the circula- 
tion in those districts where it is now scanty, would be 
thwarted by the ultimate effect of the laws in decreasing in 
rural communities the deposits, which, while at the com- 
mand of the depositors, can still be loaned to borrowers and 
circulated in the form of checks and drafts under the safe 
and prescribed limits of ordinary banking. 

The statistics given in the table, showing the record of 
insolvent banks upon the final liquidation, indicate that 
the safety of the depositor from the prior lien of the note- 
holder generally would increase as does the ratio of deposits 
to capital. This is due to the nature of the assets held by 
the insolvent banks with large deposit lines, which have 



214 ESSAYS AND SPEECHES 

yielded larger returns proportionately upon liquidation 
than the assets which have been held by the smaller in- 
solvent banks. 

The measure will stimulate in still greater degree the 
tendency of the money of the country to flow to the great 
money centers, where to fewer institutions, as time and 
competition progress, would pass the management and con- 
trol of the savings and capital of the country. We cannot 
agree to the wisdom of any measure which accelerates the 
centralization of capital in the great cities, and which, by 
separating in location those who lend money from the 
many who use it, will encourage the growth of commerce 
only in the form which has a tendency to crush out general 
business individualism. The temporary effect of such plans 
might be different, but this ultimate effect is inevitable. 

The effect of the passage of such laws would at first be a 
great stimulus to the business of banking, especially in the 
West and South. It would probably be followed by the 
change from the various state banking systems of a very 
large number of private and state banks, which would be 
anxious to avail themselves of the currency privilege. The 
right to issue such currency would give them an advantage 
over banks organized under the National Banking Law as 
it is at present, and its effect upon the plans of those inter- 
ested in the organization of new national banks would be 
to lessen the estimate of the amount of probable deposits 
to be received, which would be considered as sufficient to 
justify the starting of the bank. 

Whether a bank could issue sixty per cent or more of its 
capital in notes subject only to nominal tax, which notes it 
could loan at ordinary commercial rates, and not be com- 
pelled to invest in low-rate government securities, as in 
effect under the present system, would or would not take 
out its quota of such notes under the law, would be deter- 



BANK-NOTE CURRENCY 215 

mined somewhat by the status of its deposit line. If its 
deposit line was so large as to tax the ability of its manage- 
ment to loan the amounts currently entrusted to it, it 
might not be the policy of such a bank to take out its au- 
thorized currency, although it would be profitable for a 
smaller bank in the same community to do so. But through- 
out the West and South, and in the smaller banks of the 
cities throughout all the country, it may safely be assumed 
that the profits from the exercise of the currency privilege 
would at first be eagerly sought. 

It is urged in behalf of these plans that they follow the 
bank-note systems of other countries, which have proved 
successful; but these arguments fail to lay hold of the fun- 
damental differences in principle and environment of the 
European system of note issues from those under consider- 
ation. In the older sections of this country the note issues 
of banks, as provided for by these plans, would perhaps be 
so inconsiderable, as compared with their general business 
and deposits, as not to interfere materially with the use- 
fulness of the bank in its relation to depositors and bor- 
rowers, but, as we have endeavored to show, in the newer 
sections of the country this would not be the case. The 
United States covers a vast territory, embracing every 
variety of climate and natural resources. These natural 
resources, however, are not evenly distributed, nor is the 
acquired wealth and banking capital of the country thus 
distributed. 

As compared with England, Germany, France, Russia, 
Austria, and the older European nations, with their few 
great state banks and centralized business, which are the 
product of the evolution of centuries of financial experience 
and competition, there are in this country more than thirty- 
six hundred national banks, scattered throughout its vast 
domain, surrounded by the most differentiated business 



216 ESSAYS AND SPEECHES 

and natural environments, and dealing with most dissim- 
ilar classes of customers and collaterals. The advantages 
of our distributed system of banks over the central govern- 
ment banks of Europe are such that we can well afford to 
recognize its disadvantages in connection with proposed 
currency issues. 

In the bank-note issues of the older European nations, in 
case of insolvency, the note-holders would enjoy no prefer- 
ence over the deposit-holders. They would share ratably in 
the assets. To give the credit which enables the notes of 
these great banks to circulate, restricted by stringent laws 
as they are, no injustice to depositors, such as is proposed 
in these plans for the United States, is necessary. In one 
country only, Canada, are the note-holders preferred over 
the depositors in case of insolvency. The note-issuing banks 
of Canada are but thirty-eight in number, with a combined 
circulation of about $38,000,000. We cannot accept as safe 
any deductions, drawn from the bank-note system of these 
few central institutions of eastern Canada, which would 
tend to justify the application of the laws governing that 
system to the thirty-six hundred national banks of this 
country. 

The Comptroller desires to call attention, as a summary 
of his views upon the proposed plans, to these propositions : 

First. As a fundamental proposition, any bank-note 
system depending for security upon the commercial assets 
of banks, and sanctioned by Government, should be in- 
herently fair in its relation to the deposit-holding creditors 
and the note-holding creditors of an insolvent bank. 

Second. No system is inherently fair which creates a 
preference of the note-holder over the deposit-holder, in 
the distribution of the assets of an insolvent bank. 

Third. In none of the older countries, to the success of 
whose uncovered note systems we are referred as tending to 



BANK-NOTE CURRENCY 217 

justify the experiment in this country, is the note-holder by 
the law preferred over the deposit-holder, in the case of in- 
solvency of banks of issue. Canada, with its thirty-eight 
central banks of issue, as compared with thirty-six hundred 
scattered national banks in this country, furnishes the only 
exception to this rule. 

Fourth. The necessity of the preference under any such 
system in this country, to give security and credit to the 
notes, demonstrates that it is the depositors of the country, 
and not the banks, upon whom the great weight of the 
guaranty of the note issues must fall. 

Fifth. A fairer system would provide that, when a re- 
ceiver took charge of an insolvent bank, he should not 
first pay into the general redemption fund held by the 
Government an amount derived from the assets of the bank 
sufficient to pay the note-holders in full before paying any- 
thing to depositors, but he should pay into the fund that 
pro-rata share of the proceeds derived from the assets 
which should go to the note-holders, not as preferred cred- 
itors, but as creditors in the same class as depositors. The 
tax upon the solvent banks for the currency privilege 
should not then be limited to not exceeding one per cent per 
annum of their annual note issue, or in any other amount, 
but should be made sufficiently large to provide for the 
deficit whatever it should prove to be. 

Sixth. If under such a system, owing to causes to which 
we have referred, the tax upon the solvent banks would be 
so large as to render the issue of such currency unprofitable 
and unattractive to the banks, it would be a demonstration 
of the radical difference in the environment and condition 
of our banking system as compared with the more central- 
ized and older systems of Europe. It would be a demon- 
stration of the fact that, under the proposed legislation, 
while the banks would take the profits upon the circulation, 



218 ESSAYS AND SPEECHES 

the depositors would take the bulk of the losses. It would 
be a conclusive demonstration of what we believe to be the 
fact that, under our banking system as at present organ- 
ized, the absolute safety of notes, secured only by commer- 
cial assets and issued to the extent proposed in these plans, 
can be secured only by resort to a grave injustice upon 
depositors which cannot be justified upon any grounds of 
public policy. 

Seventh. Such a system of uncovered notes as this pro- 
posed, providing for a preference of the note-holders over 
other creditors, would interfere radically with the more 
important functions of national banks, to which the note- 
issuing function is secondary and subordinate. This would 
be against public policy, and would operate against bank- 
ing in the smaller communities, and in the western, south- 
ern, and central portions of our country. 

Eighth. The Government of the United States is not in 
such straits, in connection with its present currency system, 
as to compel it to enter into a plan of currency changes, by 
which it in effect sells extended and valuable currency priv- 
ileges to the national banks of the country, in exchange for 
assistance from them in meeting its present governmental 
currency obligations payable in gold. 

Ninth. If the present conditions of governmental cur- 
rency demand reforms, to secure which will entail cost, it is 
better for the Government, as the representative of all the 
people, and under all the circumstances connected with 
our banking system, to pay an ascertained and exact cost 
direct, than to endeavor to evade it by granting extensive 
currency privileges to banks, which of necessity must reim- 
burse themselves from the community and the depositor 
class for any cost which they incur in assuming the bur- 
den of gold redemption, or maintaining the credit of their 
notes. 



BANK-NOTE CURRENCY 219 

The most serious objection which is urged against our 
present system of bank-note currency is its inelasticity and 
inability to respond to the pressing demands and necessity 
for an increase of circulation in times of enforced liquida- 
tion due to a commercial and banking panic. Under nor- 
mal business conditions and in normal times, the inelas- 
ticity of the present note issues of banks causes but small 
inconvenience, though at certain seasons of the year, when 
crops are to be moved, banks in certain sections of the 
country are compelled to rediscount their paper somewhat 
to supply the needed currency. The demand, however, is 
usually supplied by the banks of the East, and the growing 
wealth of the West and South is rapidly bringing about 
a more even distribution of capital and consequently of 
currency. 

We have at present in this country an enormous volume 
of what may be called bank-credit currency, based upon 
the assets of our banks, and consisting of checks, drafts, 
and bills of exchange. This volume of bank-credit currency 
expands and contracts in accordance with the demands of 
trade and business under normal conditions, and is the 
medium through which the great bulk of the business of our 
country is transacted. It is extremely elastic, and varies in 
amount at different seasons of the year. It is generally 
amply adequate to the business needs of the country, ex- 
cept in times of disturbed confidence and financial panic. 

In France and Germany and other countries, where the 
check and draft system is not developed as it is here, there 
exists the greater need for large and elastic bank-note is- 
sues. In England, where the check and draft system is so 
well developed, we find more strict provisions regarding 
uncovered note issues. The Bank of England issues no 
notes unsecured either by the deposit of gold bullion or a 
government debt. Since the law of 1844, the other banks 



220 



ESSAYS AND SPEECHES 



of issue of England, Scotland, and Ireland can emit no 
more uncovered notes than the amount in existence at that 
time. The right to issue uncovered notes is thus limited, 
and the combined issues of uncovered notes of the banks 
of England, Scotland, and Ireland is comparatively small. 

Fixed issues of the Bank of England and of the other banks of issue 
in the United Kingdom in December, 1897 l 



Circulation 



England, Bank of 

England, private banks . . . 
England, joint-stock banks 
Scotland, joint-stock banks 
Ireland, joint-stock banks . 

Total 




£16,800,000 
1,374,376 
1,762,961 
2,676,350 
6,354,494 



£28,968,181 



The average issues for the four weeks ended on December 4, 1897, of the joint-stock 
and the private banks of England and of Wales were £1,470,898, or £1,666,439 below the 
fixed amount. 

The average issues of the joint-stock banks of Scotland and Ireland for the four weeks 
ended on November 27, 1897, were £14,862,261 or £5,831,417 above the fixed issues. 
These banks held in specie during the same period £9,703,888, leaving uncovered £5,158,373 
of their issues. 



The enormous growth of the business of England, since 
the enactment of the law of 1844, has developed no such 
need of uncovered notes as to have brought about a reversal 
of that restrictive legislation. While in this country, with 
its extended system of banks and its great development 
of the check and draft system, some degree of elasticity 
in bank-note issues is desirable, it is not essential that it 
should be an amount so large as to make necessary for its 
security an injustice upon the depositor, and thus, by in- 
terfering with the check and draft system, defeat one of 
its own prime objects. 

The general principles and regulations under which such 

1 London Bankers' Magazine, January, 1898, page 119. 



TABLE I. — CAPITAL, ASSETS, CLAIMS PROVED, DIVIDENDS PAID 
VALUABLE ASSETS TO NOMINAL ASSETS UPON FINAL LIQI 
WHICH HAVE BEEN FINALLY CLOSED, 1865 TO MAY, 1898, — CLA 



Geographical 
divisions 



New England.. 

Eastern 

Southern 

Middle 

Western 

Pacific 

Total 



A T o. of 
banks 



Capital 



$2,571,300 
9,155,600 
4,775,000 
9,122,000 
3,382,000 
1,725,000 



$30,730,900 



$17,195,440 
31,135,897 
15,263,365 
24,153,212 
9,308,471 
5,687,777 



$102,744,162 



Claims 
proved 



$11,508,426 
18,399,239 
10,111,715 
11,167,256 
3,352,511 
2,628,811 



$57,367,958 



Dividends paid 



$9,626,055 
14,469,195 
6,611,266 
7,996,983 
2,195,061 
1,644,705 



$42,543,265 



83.64 
78.64 
65.38 
71.61 
61.79 
62.56 



74.16 



TABLE II. — CAPITAL, ASSETS, CLAIMS PROVED, DIVIDENDS PAID ; Hi 
ABLE ASSETS TO NOMINAL ASSETS UPON FINAL LIQUIDATION 
AFFAIRS OF WHICH HAVE BEEN FINALLY CLOSED, 1865 TO Mi 



Class 



$50,000 
100,000 



Total. 



$200,000 

300,000 

500,000 

Over 500,000 



Total . 



Grand total . 



dum- 
ber 
of 
banks 



08 



195 



Capital 



$3,280,000 
5,634,000 



$8,914,000 



$6,355,600 
4,350,000 
4,300,000 
6,811,300 



$21,816,900 



$30,730,900 



$8,733,255 
18,034,198 



$26,767,453 



$17,748,526 
16,369,761 
23,402,935 
18,455,487 



$75,976,709 



$102,744,162 



Claims 
proved 



$4,424,178 
9,891,367 



$14,315,545 



$9,211,748 
9,042,532 

16,558,203 
8,239,930 



$43,052,413 



$57,367,958 



Div idends paid 



$2,859,618 
6,262,487 



$9,122,105 



$7,321,036 
6,866,897 

12,441,201 
6,792,026 



$33,421,160 



$42,543,265 



64.64 
63.31 



63.72 



79.47 
75.94 
75.13 
82.43 



77.62 $ 



74.16 



STATES EMBRACED WITHIN THE GEOGRAPB 

New England: Maine, New Hampshire, Vermont, Massachusetts, Rhode Island, 
Connecticut. 

Eastern : New York, New Jersey, Pennsylvania, Delaware, Maryland, District of 
Columbia. 

Southern : Virginia, West Virginia, North Carolina, South Carolina, Georgia, 
Florida, Alabama, Mississippi, Louisiana, Texas, Arkansas, Kentucky, Tennessee. 

Middle : Ohio, Indiana, Illinois, Michigan, Wisconsin, Minnesota, Iowa, Missouri. 



AI 

W( 
olu 
Pa 
CI: 

eci.i 

>g 
mi 



rOTAL REALIZED FROM ASSETS, AND THE RATIO OF 
OF INSOLVENT NATIONAL BANKS, THE AFFAIRS OF 
ION BY GEOGRAPHICAL DIVISIONS 



wed 


Dividends 

paid from 

assets 


Loans paid 

and other 

disbursements 


Total realized 
from assets 


Ratio of valuable assets 
to nominal assets upon 
final liquidation 


06 
53 
99 
84 
52 
73 


$8,459,272 
11,881,870 
5,625,641 
6,785,456 
1,470,922 
1,452,295 


$386,946 
2,398,475 

477,224 
2,042,152 
1,033,518 

491,737 


$10,207,324 
17,260,498 
6,808,364 
11,796,392 
3,083,292 
2,538,605 


59.36 
55.44 
44.61 
48.84 
33.12 
44.63 


67 


$35,765,456 


$6,830,052 


$51,694,475 


50.31 



AX REALIZED FROM ASSETS, AND THE RATIO OF VALU- 
,VENT NATIONAL BANKS, ARRANGED BY CLASSES, THE 



wed 


Dividends 

paid from 

assets 


Loans paid 

and other 

disbursements 


Total realized 
from assets 


Ratio of valuable assets 
{represented by offsets, 
dividends, etc.) to 
nominal assets, upon 
final liquidation 


75 
29 


$2,268,559 
5,259,575 

$7,528,134 


$664,800 
1,093,226 


$3,465,334 
7,584,130 


39.68 
42.05 


M 


$1,738,026 


$11,049,464 


41.28 


J3 
13 
58 
19 


$5,858,655 
5,716,873 

11,506,301 
5,155,493 

$28,237,322 


$693,963 

1,544,996 

264,366 

2,588,701 

$5,092,026 


$7,895,311 
8,629,562 

15,321,625 
8,798,513 

$40,645,011 


44.48 
52.72 
65.47 
47.67 


33 


53.50 


37 


$35,765,456 


$6,830,052 


$51,694,475 


50.31 



ISIONS REFERRED TO IN TABLES 



North Dakota, South Dakota, Nebraska, Kansas, Montana, Wyoming, 
rew Mexico, Oklahoma, Indian Territory. 

Washington, Oregon, California, Idaho, Utah, Nevada, Arizona, 
tion by capital stock is as follows : First division includes banks of $50,000; 
r $50,000 and not exceeding $100,000 ; Third, over $100,000 and notexceed- 
) ; Fourth, over $200,000 and not exceeding $300,000 ; Fifth, over $300,000 
eeding $500,000 ; and Sixth, over $500,000. 



T4.ULE I. -CAPITAL, ASSETS, CLAIMS PROVED, DIVIDENDS PAID; THE TOTAL REALIZED FROM ASSETS, AND THE RATIO OF 
VALUABLE ASSETS TO NOMINAL ASSETS UPON FINAL LIQUIDATION OF INSOLVENT NATIONAL BANKS, THE 
WHICH HAVE BEEN FINALLY CLOSED, 1865 TO MAY, 189S, — CLASSIFICATION BY GEOGRAPHICAL DIVISIONS 



W 


G£ 


— 


„„ 


SSa 


Di^^paM 


0#<e« attorned 


S3P 


Xoo.mj.aid 


SS=S* 


*„„<, „/,,,w„..„,„. 


A„o» M 


Fir am 


^si&sa^ 


New England.. 

Southern 

Middle 

Western 


33 


32,571,300 

9,122,000 
E72o!o00 


$17,195,440 

51,103,30; 

24|l53i'212 

9,303,171 
5,087,777 


fll...OS,4-.'U 

is..irv'3:i 
10,111,715 
11,107,250 
3.0.-12,511 
2,023,311 


$o.<;2i;,ii55 

■ :.<:■, ,,>; 
0,011,200 
7,11110,933 
2.105,001 
1,044,705 


83.04 
78.04 
:...: 
71.01 
01.79 
62.56 


$1,301,100 

25050,153 
705,499 

2,373,754 
578,852 
594,573 


$8,459,272 
11,881,870 
5,625,641 
6,785,456 
1,470,922 
1,452,295 


$386,946 
2,398,476 

".012J52 
1,033,518 
491,737 


$111,207,321 
17,200,498 
6,808,364 
11,796,392 
3,083,292 
2,538,605 


69.36 
55.44 
44.61 
48.84 






T °" 


195 


830,730,990 


$102,744,162 


$57,3G7,958 


542,543,265 


74.10 


59,093,907 


$35,705,450 


$6,830,052 


$51,094,475 


60.31 



TABLE II. -CAPITA I., ASSETS, CLAIMS PROVED, DIVIDENDS PAID ; THE TOTAL REALIZED FROM ASSETS, AND THE RATIO OF VALU- 
ABLE ASSETS TO NOMINAL ASSETS 1PIIN FINAL LIQUIDATION OF INSOLVENT NATIONAL BANKS, ARRANGED BY CLASSES, THE 
OF Willi II HA\i; liELX FINALLY CLOSED, 1805 TO 5IAY, 1898 





!,}L 


— 


»- — 


sss 


M^ 


~ 


s& 


!<><m: /,„,,! 


7550 r. .,0:, ,i 


final liqiitdatw!, 




— 


Perctnl 


$50,000 
100,000 


66 


$3,280,000 
5,634,000 


$8,733,255 
13,031,105 


$4,424,178 

3,501,307 


$2,550,015 
0,202,437 


03.31 


$551,975 
1,231,320 


$2,263,5511 
5,250,575 


$664,800 
1,093,226 


$3,465,334 
7,584,130 


S9.68 
42.05 


Total 


127 


(8,914,000 


S20.707.153 


814,31 5,545 


$0,122,105 


63.72 


$1,783,304 


$7,523,134 


$1,738,026 


$11,049,464 


41.28 


30o!0OO 

500,000 

Over 500,000 


16 
9 
6 


$0,355,000 
1,350.000 
1 ,51 10,000 
6,811,300 


"lO^GOJCl 
23,402,935 


$0,211.7-18 
10,V,5S;jb3 

3,230,030 


$7,321,030 



12,441,201 
0,702,020 


79.47 

75 04 
75.15 


$1,342,693 

1,557,003 
5.550.053 


$5,353,055 
5,710,873 


S693.963 

1.5-14,0.10 
204,300 
2,588,701 


$7,895,311 

5,020,502 
15,521,035 
8,798,513 


62572 


Total 


68 


$.21,8111,900 


$76,970,709 


S45.052..I13 


$33,421,160 


77.62 


$7,315,663 


$25,237,322 


$5,092,020 


$40,046,011 


53.50 




195 


$30,730,900 


$102,744,162 


$57,367,958 


$42,543,205 


74.16 


$9,098,967 


$35,765,456 


$6,830,052 


$51,694,475 


60.31 



STATES EMBRACED WITHIN THE GEOGRAPHICAL DIVISIONS REFERRED TO IN TABLES 

New England: Maine, New Hampshire, Vermont, Massachusetts Rhode Island, Western: North Dak, .hi. So Inkoto, Nebraska, Kansas, Montana, Wyoming, 

,„„„,, i( , uL " Colorado, New Mexico, Oklahoma, Indian Territory. 

Listen,: Now Yoilt, New .leis-v, Pennsylvania, Delaware, Maryland, District < 
)olumliia. 
Southern : Virginia. We. I Yoeonia, N'uMi t 

oil Hl'.ci, 



by capital sto 

$50,0110 ami not exceeding :$100,000 

. .,' ,'. .. 



icludee banks of $50,000; 
and not exceeding $300,000 ; Fifth, over $300,000 



TABLE III. -ESTIMATED LOSS TO DEPOSITORS OF INSOLVENT^' 
ISSUES EQUALING 100, 80, AND 60 PER CENT OF CA 



Geographical 

divisions, by 

States 



New England 

Eastern 

Southern 

Middle 

Western 

Pacific 

Total.... 



New England 

Eastern 

Southern 

Middle 

Western 

Pacific 

Total 



New England 

Eastern 

Southern 

Middle 

Western 

Pacific 

Total . . . . 



Num- 
ber of 

banks 



195 



195 



195 



Per cent of 
dividends ac- 
tually paid 
depositors on 
claims proved, 
as shown by 
preceding ta- 
bles 



83 64 
78.64 
65.38 
71.61 
61.79 
62.56 



74.16 



83.64 
78.64 
65.38 
71.61 
61.79 
62.56 



74.16 



83.64 
78.64 
65.38 
71.61 
61.79 
62.56 



74.16 



Circulation 



100 per cent 
of capital 

$2,571,300 
9,155,600 
4,775,000 
9,122,000 
3,382,000 
1,725,000 



$30,730,900 



80 per cent 
of capital 

$2,057,040 
7,324,480 
3,820,000 
7,297,600 
2,705,600 
1,380,000 



$24,584,720 



60 per cent 
of capital 

$1,542,780 
5,493,360 
2,865,000 
5,473,200 
2,029,200 
1,035,000 



$18,438,540 



Dividends actually paid depos- 
itors on claims, as s/ioirn hy 
preceding tables, increased by 
receipts which would be re- 
ceived from circulation, less 
5 per cent fund in the same 
ratio as that of valuable as- 
sets to nominal assets shown 
in preceding tables 



$11,076,062 
19,291,266 
8,634,887 
12,229,408 
3,259,173 
2,376,079 



$50,866,875 



$10,786,060 

18,326,852 

8,230,162 

11,382,923 

3,046,250 

2,229,804 



$54,002,151 



$10,496,059 
17,362,437 
7,825,438 
10,536,438 
2,833,528 
2,083,529 



$51,137,429 



lTIONAL banks, with circulation as a preferred CLAIM - 

U CAL - CLASSIFICATION BY GEOGRAPHICAL DIVISIONS 


dividends winch would remain 

after deducting circulation 
• (less 5 per cent fund) as a 
| preferred claim from, divi- 
i dends oil claims and receipts 

from circulation as shown by 

previous column 


Per cent of divi- 
dends which 
would be paid 
on all claims 
proved, after 
deducting cir- 
culation, less 5 
per cent fund 


Per cent of loss on claims 
by preference of proposed 
circulation, being the dif- 
ference between the per- 
centage of dividends ac- 
tually paid depositors on 
claims proved, and the 
percentage which would 
be paid on claims after 
deducting proposed cir- 
culation 


Percentage of 
loss up on the 
amount ac- 
tually re- 
ceived by 
dep ositors, 
which would 
result from 
preference 
of proposed 
circulation 


$8,633,327 

10,593,446 

4,098,637 

3,563,508 

46,273 

737,329 


75.02 
57.58 
40.53 
31.91 
1.30 
28.05 


8.62 
21.06 
24.85 
39 70 
60.49 
34.51 


10.30 

26.78 
38.00 
55.44 
97.89 
55.16 


$27,672,520 


48.24 


25.92 


34.95 


$8,831,872 

11,368,596 

4,601,162 

4,450,203 

476,030 

918,804 


76.74 
61.79 
45.50 
39.85 
13.40 
34.95 


6.90 
16.85 
19.88 
31.76 
48.39 
27.61 


8.25 
21.42 
30.41 
44.35 
78.31 
44.13 


$30,646,667 


53.42 


20.74 


27.97 


$9,030,418 

12,143,745 

5,103,688 

5,336,898 

905,788 

1,100,279 


78.47 
66.00 
50.47 
47.79 
25.50 
41.85 


5.17 
12.64 
14.91 
23.82 
36.29 
20.71 


6.18 
16.07 
22.80 
33.26 
58.73 
33.10 


$33,620,816 


58.61 


15.55 


20.97 











TABLE III.- 


•:stb 


ATED LOSS TO DEPOSITORS OF INSOLVENT N 
EQUALING 100, 80, AND 60 PER CENT OP CAP; 


TIONAL BANKS, WITH CIRCULATION AS A PREFERRED 11. AIM 






;. 


^ 


S 


%JS <"- 




[- '■■';. ;„,:;:.'„,.• \! L '-C,. 


; ^!~ ■■ ■ 


.„.';',, flflll 


New England. .. 
Eastern 

Mi.Wl.-. "■'-'-'-'. 


60 
33 


78.64 

7L61 
01.79 
02.50 


Hit) JUT l-l Hi 

0/ cupilal 

i-J,.-.?l, 3llii 
:i.l.-.:,,iinii 
4,775,000 
9,122,000 

ljojooo 


$11,076,062 
19,291,200 
8,634,887 
12,229,408 
3,259,173 
2,376,079 




$8,633,327 
10,093,440 
4,098,037 
3,563,008 
40,273 
737,329 


75.02 
67.68 
40.53 


8.02 
21.06 
24.86 
39 70 
60.40 
31.61 


10.39 

38/00 
66.44 
97,80 
K..1I1 




T0tnl 


195 


74.10 


530,730,900 


$56,866,875 




$27,672,520 


48.24 


16.09 


34.06 


New England. . . 

Southern 


10 
50 
33 


6o!38 
71.61 
61.79 
02.56 


<2,H-,7,04H 

7.021,4*1 
•i.k-o.uiiii 
;,2'i7,i'.i»i 
2,7(i.'.,r.i»i 

1,380,000 


810,780,060 
18,320,852 
3,230,102 
11,382,023 
3,046,250 
2,229,804 




$8,831,872 
11,368,690 
4,601,162 
4,450,203 
476,030 
918,804 


61.79 
45.50 
39.86 

34^95 


10!86 
10.89 

31.70 
48.39 
27.111 


8.25 
21.42 

i.r.3r. 

7S.SI 






Total 


IDS 


74.16 


824,584,720 


554,002,151 




$30,046,067 


53.42 


20.74 


27.97 


New England. . 
Southern 

PaciHc. ".'.'.','.'. 


33 


83.64 
78.64 
65.38 
71.61 
61.79 


IHI p, , Cr',,1 

0/ capital 

Sl,.-,12.7sii 
6,493,300 
2,805,000 
5,473,200 
'.•.II2!I,20H 
1,035,000 


$10,496,059 
17,302,437 
7,825,438 
10,536,438 
2,833,628 
2,083,629 




$9,030,418 

6|l03!es8 

6,330.808 
905,788 
1,100,279 


78.47 
66.00 
69.47 
47.79 
26.60 
41.85 


6.17 

w!oi 

23.82 
30.29 
20.71 


10^07 
22.80 
88,26 
68.78 

33.10 


Total 


105 


74.16 


Ms, 108,54" 


$51,137,429 


$33,620,816 


68.01 


16.6.-. 


20.97 . 



Ovir 500,000 

Total 

Grand totiU.. 



:««i,«m 

r,Mn,ni»j 

., ;.i.i,ik»i 



-.■IKI. 

:ii«i. i 

r,i>i,n»i 



./-Mi:' , 



76.94 

7, r . i:i 
82.43 



WUprmnl 

280,000 

034,000 






■■.,;:,i:. ::; 



ji,iiip,s;o 

j.l.'.V.S.KJil 

l.'Jl.l.n,.! 



BMra.Mi 



BANK-NOTE CURRENCY m 

elasticity might be obtained, are not in any way inconsist- 
ent with the principles and arguments we have endeavored 
to set forth. As covering these general principles, and as 
a conclusion from the views hereinbefore expressed, the 
Comptroller would make the following recommendations 
in regard to the present laws governing the issue of national 
bank-notes : — 

First. The existing bank-note system, based upon de- 
posit of government bonds as security, should not now 
be abandoned. 

Second. For the purpose of allowing elasticity to bank- 
note issues to protect the banks and the community in 
time of panic, a small amount of uncovered notes, in ad- 
dition to the secured notes, should be authorized by law 
under the following limitations : They should be subjected 
to so heavy a tax that they could not be issued in normal 
times for the purpose of profit, but would be available in 
times of emergency. The tax should be so large upon the 
solvent issuing banks as to provide a fund, which, in con- 
nection with the pro-rata share of the assets of an insol- 
vent bank, would be sufficient to redeem the notes in full, 
without necessitating any preference of note-holders over 
depositors of any insolvent issuing bank. The tax should 
be so large as to force this currency into retirement as soon 
as the emergency passes. 

Such a currency could be used only to lessen the evil 
effects of the too rapid liquidation of credits which are col- 
lapsing under a financial panic, but could not be profitably 
used as a basis of business speculation and inflation. It 
should be to the business community what the clearing- 
house certificates are to our cities in times of panic — a 
remedy for an emergency, not an instrument of current 
business. 

The tables hereinbefore referred to are printed herewith. 



%m ESSAYS AND SPEECHES 



NATIONAL-BANK EXAMINERS 

The character of the work performed by the national- 
bank examiners is most important in its relation to all 
sections of our country, and to all classes of our people. 

For the proper conduct of the work of supervision of our 
national banks, examiners must be men of the highest per- 
sonal character and extended business experience. They 
should be men who possess some skill in accounting, and at 
the same time the business judgment to enable them to in- 
telligently pass upon the lines of credit extended by banks 
under their supervision. 

The appointment by the Comptroller to these impor- 
tant positions, of competent and able men, is one of the 
most sacred duties of his office. To protect by every pos- 
sible safeguard their independence and disinterestedness 
is equally important. With this latter object in view, the 
Comptroller has forbidden the practice, which he found in 
existence in some of the larger cities, of the employment of 
the examiners by banks of their district in special examina- 
tion work for the benefit of the bank, and not for the Comp- 
troller's office. This practice had a tendency to interfere 
with the rigid impartiality which should characterize the 
work of a government official. 

During the year the Comptroller has extended over the 
cities of New York, Boston, Philadelphia, and Baltimore 
the system of semi-annual visitations by examiners, in 
force in all other sections of the country. He has utilized, 
with some benefit, the examiners in investigations into the 
credit of heavy debtors of banks, where such indebtedness 
constituted a menace to the safety of the banks, and where, 
despite the criticisms of the Comptroller and the efforts of 
the bank officials, no material reductions in the amount 
of the indebtedness could be had. The necessity for such 



BANK-NOTE CURRENCY 223 

investigations sometimes arises, and whenever they have 
been made, the result has been most beneficial. 

The verification, by more extended investigation than is 
possible in the ordinary examination of a bank, of the ex- 
parte statements of interested officials, as to the safety of 
large, permanent, and unreducible loans, sometimes be- 
comes of vital importance in determining the course of the 
Comptroller in closing a bank or allowing it to remain 
open. For the purposes of this work he recommends an in- 
crease in the annual fund provided for examinations of 
bank-note plates, and for compensation of examiners en- 
gaged in special examinations, of $2000, making the fund 
$3000 instead of $1000, as at present. 

LIMITATION OF LOANS 

One of the most important reforms needed in the present 
National Banking Law is a proper provision limiting the 
amount which can be loaned to any one individual or cor- 
poration, in order to insure a general distribution of loans, 
and to prevent an improper concentration of a bank's funds 
in the hands of a few borrowers. The provision of the pres- 
ent National Banking Law designed to carry into effect 
this important principle is as follows : — 

Sec. 5200. The total liabilities to any association of any person, 
or of any company, corporation, or firm, for money borrowed, in- 
cluding in the liabilities of a company or firm the liabilities of the 
several members thereof, shall at no time exceed one-tenth part 
of the amount of the capital stock of such association actually 
paid in. But the discount of bills of exchange drawn in good faith 
against actually existing values, and the discount of commercial 
or business paper actually owned by the person negotiating the 
same, shall not be considered as money borrowed. 

Almost as if in admission of the fact that this provision 
is unscientific, and ill-adapted to carry into practical effect 



224 ESSAYS AND SPEECHES 

the great principles of protection to depositors and share- 
holders, subserved by generally distributed and safe loans, 
the present law provides no specific penalty against indi- 
viduals which the Comptroller can apply for violations of 
this section in the making of excessive loans, where such 
violations do not affect the solvency of the bank, nor justify 
the appointment of a receiver. A United States court, under 
the general provision of the law providing for the forfeiture 
of the franchises of a bank for any violations of the Bank- 
ing Act, might adjudicate the question of fact as to such 
violations, but could apply no other remedy than forfeiture 
of franchise. 

Since the institution of the national banking system the 
violation of this provision has been common; and the Comp- 
troller, though allowing no known violation to escape his 
written protest, finds great practical difficulty in his en- 
deavors to enforce this requirement. On September 20, 
1898, the date of the last call by the Comptroller for state- 
ments of condition of national banks, 1124 banks, con- 
stituting nearly one third of the entire number of banks in 
the system, reported loans in excess of the limit allowed by 
section 5200, Revised Statutes of the United States. 

The principles underlying the present provision of the 
law are as valuable to depositors and shareholders, in their 
application to the banks of the larger communities, as to 
the banks of the smaller communities; but the observance 
of this provision, while not interfering with the current 
requirements of either the banks or the public in smaller 
communities, proves an almost insurmountable obstruc- 
tion to the business of our larger cities. 

The present need is for an amendment to this provision, 
which, while compelling, under penalties, the safe and 
proper distribution of loans of larger banks, will enable 
them to loan more nearly the same percentage of their 



BANK-NOTE CURRENCY 225 

total assets which the present provision allows to small 
banks. In this way the officers of larger banks can supply 
the proper needs of the larger communities without dis- 
regarding the law, and the Comptroller can hold them, 
under personal penalty, to strict observance of the amended 
law, which when disregarded would indicate improper dis- 
tribution of loans, something which infractions of the 
present provisions in the case of many banks do not neces- 
sarily indicate. 

The greater ratio borne by banking resources to banking 
capital in the larger communities, as compared with the 
like ratio in smaller communities, is responsible for the de- 
fective and unequal working of the present provision. The 
average ratio of resources to the average capital of the 47 
national banks in the city of New York is as 18 is to 1; of 
the 17 national banks in Chicago, as 10.2 is to 1; of the 6 
national banks in St. Louis, as 7.3 is to 1 ; of the 257 national 
banks in other reserve cities, as 6.6 is to 1; while in 3255 
country banks the ratio is but as 4.7 is to 1. 

The law limiting loans to 10 per cent of the capital, when 
applied to the 3255 banks of the smaller communities of 
the country, as a whole, would allow the loaning of 2.14 per 
cent of their total assets to one individual. As compared 
with this, the banks of the city of New York, on the aver- 
age, could not -loan over .5Q of one per cent of their total 
assets to any one individual; the banks of Chicago, not 
over .98 of one per cent of their total assets; the banks of 
St. Louis, not over 1.4 per cent of their total assets; the 
banks of other reserve cities, not over 1.51 per cent of their 
total assets. 

In other words, the proportion of their assets which the 
country banks of the United States can loan, in strict com- 
pliance with section 5200, to one individual, is .63 of one 
per cent greater than in 257 reserve cities, .74 of one per 



ESSAYS AND SPEECHES 

cent greater than in St. Louis, over twice as great as in 
Chicago, and nearly four times as great as in the city of 
New York. 

This provision, as it stands at present, constitutes an in- 
centive to the making of loans the larger in proportion to 
the total assets of banks in smaller communities, where, 
as a rule, large loans which are safe are the most difficult to 
secure; while in the larger business centers of the country, 
where commercial conditions create a certain demand both 
from banks and borrowers for large and safe loans, its 
effect is the reverse to such an extent as to be injurious. 

A bank with smaller loans is not necessarily a bank with 
the more distributed and safe loans. A bank with $100,000 
capital and $100,000 deposits, the latter being loaned in 
the maximum amounts allowed by the present provision 
(to wit, to ten individuals at $10,000 each), has not as well 
distributed loans as a bank of $1,000,000 capital and 
$5,000,000 deposits, the latter loaned to fifty people at the 
maximum of $100,000 each. In the former case the loans 
are distributed among only ten people and in the latter 
case among fifty people, and yet in each case there is strict 
compliance with the ten per cent restriction. 

One of the objects evidently designed to be subserved by 
the present provision of the law was the protection of the 
capital of a bank, as distinguished from other assets of the 
bank. The framers of the section undoubtedly considered 
the capital of a bank as a greater safeguard for the deposi- 
tors against loss, when not over one-tenth part of it was 
loaned to a single individual or corporation without secu- 
rity. They recognized the fact, however, that when outside 
security was had for loans, the capital did not need for its 
protection the ten per cent restriction; and they provided 
accordingly for the exemption from the restriction of a 
certain class of secured loans, as follows : — 



BANK-NOTE CURRENCY 22? 

But the discount of bills of exchange drawn in good faith against 
actually exisitng values, and the discount of commercial or busi- 
ness paper actually owned by the person negotiating the same, 
shall not be considered as money borrowed. 

In the modification of section 5200, which we will recom- 
mend, we invoke the same principle of outside security for 
the protection of the capital against loss upon loans exceed- 
ing the ten per cent limit. 

The size of a loan is, of itself, no indication either of its 
strength or weakness. If the size of a loan is not such as to 
be an undue concentration of the assets of a banking insti- 
tution in the hands of one individual or corporation, thus 
depriving its creditors and shareholders of the safety of the 
law of average, it is not wise, either upon economic grounds 
or upon grounds of public policy, to forbid it by law. If, 
however, the size of a loan is such as to cause such undue 
concentration, its prevention is justifiable on both grounds. 

Recognizing these truths, it is the easier to understand 
why in many instances a strict compliance with this pro- 
vision of the law (sec. 5200, R.S., U.S.) is consistent with 
all the needs of the current business of a small community 
and a proper protection to both banks and the public, yet 
in some larger communities it seriously interferes with the 
business requirements of both the banks and the public, 
and adds in no way to the safety of the depositor. 

The limit of the amount of single loans to an arbitrary- 
percentage of either the capital, or the sum of the capital 
and surplus of a bank, does not insure a general or proper 
distribution of loans in all cases. Since, as stated before, 
the size of a loan is not, per se, related to its safety, the 
more important proportion to consider, when endeavoring 
to regulate the distribution of loans by law, is that of the 
amount of the loan to the total assets, rather than that of 
the loan to the amount of the capital. 



228 ESSAYS AND SPEECHES 

Grounds of public policy suggest as advisable the largest 
liberty in loans, not inconsistent with the absolute safety 
of the depositor. The habitual disregard of the present 
provision by the officers of so many banks interferes with 
the proper supervision of the banks by the Comptroller, 
and tends to create indifference to the other restrictions of 
the National Banking Law. 

The failure of the present law to provide the power to 
apply a personal penalty for the making of excessive loans 
sometimes embarrasses the Comptroller in endeavoring to 
check tendencies toward recklessness in loaning, which 
point to the ultimate ruin of a banking institution. 

As before stated, the present provision, when properly 
altered, should allow the banks of larger communities to 
have more nearly the privilege of loaning a given per cent 
of their total assets to one individual, which now belongs, 
under a strict compliance with the present provision, to 
the banks of the smaller communities. From this privilege 
they are now debarred by law. 

The desired results can be obtained, in our judgment, 
by adding, after the words, in section 5200, "shall at no 
time exceed one-tenth part of the amount of the capital 
stock of such association actually paid in," the following 
words : — 

Provided, That the restriction of this section as to the amount 
of total liabilities to any association, of any person, or of any com- 
pany, corporation, or firm for money borrowed, shall not apply 
where a loan in excess of one-tenth part of the capital stock shall 
be less than two per cent of the total assets of said bank at the 
time of making said loan. Said loan shall be at all times protected 
by collateral security equal to or greater in value than the excess 
in the amount of said loan over one tenth of the capital stock. 

A strict and personal penalty, enforcible by the Comp- 
troller, should then be provided for infractions of the 



BANK-NOTE CURRENCY 229 

amended section by the officers of banks, to enable the 
Comptroller to successfully enforce general and strict com- 
pliance with its terms. 

The suggested amendment will make section 5200 just 
and equitable in its relation to all national banks, and to 
all communities of our country, large and small, which it is 
not at present. It would not lessen the amount which the 
smaller banks can now loan in compliance with the section 
as it stands at present. At the same time it would not al- 
low the larger banks to loan to any one individual or cor- 
poration more than ten per cent of their capital, unless 
such loan, in addition to being secured for the excess, would 
still amount to a less per cent of their total assets than the 
per cent of total assets which the smaller banks can now 
loan under the section as it stands at present. 

Section 5200, thus amended, will not interfere, as at pres- 
ent, with the right of the banks in the larger communities 
to meet the legitimate requirements of business in these 
commercial centers. It will enable the Comptroller, by its 
enforcement, to prevent an undue concentration of loans 
and conserve their general distribution. Under the section, 
thus amended, the capital of a bank will be protected, in- 
asmuch as no loan in excess of the ten per cent limit can 
then be made, except upon proper collateral security. The 
penalty clause will enable the Comptroller not only to 
limit size, but to enforce the securing of excessive loans. 

The following table (on page 230) shows the inequality 
of the present law in its practical effects upon the banks 
of larger and smaller communities, so far as the possible 
distribution of loans is concerned. 

For the purpose of ascertaining the general result of the 
suggested amendment to section 5200, of the United States 
Revised Statutes, an examination has been made of the re- 
ports of condition of the national banks of date July 14, 



230 



ESSAYS AND SPEECHES 



Banks in 


Number 
of 

banks, 
July lh, 

1898 


Average re- 
sources 


Average 
capital 


Maximum 

average 
loan, 10% 
of capital 


Ratio of 

average 

resources 

to average 

capital 


Average max- 
imum loan 
to average re- 
sources now 
allowed by 
section 5200 


New York 

City 

Chicago 

St. Louis 


47 

17 

6 


$18,598,379 
11,632,219 
10,257,586 


$1,036,170 
1,144,118 
1,400,000 


$103,617 
114,411 
140,000 


18 tol 

10.2 to 1 
7,3 to 1 


.56 of 1% 
.98 of 1% 

1.4% 


All central re- 
serve cities . 

Other reserve 
cities 

Country 
banks 


70 

257 

3,255 


16,191,676 

3,909,561 

565,130 


1,093,571 
591,343 
120,888 


109,357 
59,134 
12,088 


14.8 to 1 

6.6 to 1 

4.7 to 1 


.68 of 1% 
1.51% 

2.14% 


United States. 


3,582 


1,110,462 


173,650 


17,365 


6.4 to 1 


1.56% 



1898, and examiners' reports for approximate dates nearest 
thereto. In the table on page 231 is set forth the number 
of banks in reserve cities named, total loans outstanding 
November 1, loans in excess of the legal limit, loans which 
would be excessive if allowed to the limit of two per cent of 
the total resources, and number of banks in which loans 
equaling ten per cent of their capital would be greater than 
two per cent of total assets, the loaning power of which the 
proposed limit would not increase. The table also shows 
similar information relative to one hundred banks selected 
at random from various sections of the country. 



INSOLVENT BANKS 

The Comptroller of the Currency is charged with general 
responsibility for the proper liquidation and distribution 
of the assets of the insolvent banks of the country, in the 
hands of receivers appointed by him. At present the assets 
of insolvent national banks of the country under his direc- 
tion are of the nominal value of $48,000,000. 

The decision of questions which are daily submitted by 
different receivers as to the proper disposition of these 



BANK-NOTE CURRENCY 



231 



CUiet 


No. of 
banks 


Total no. of 
loans out- 
standing, 
Nov. 1, 1898 


No. of 
excessive 
loans 
under 
section 
5200 


No. of loans in 

excess of the 

proposed 2% 

limit 


No. of banks in 
which loans equal- 
ing 10% of their 
capital would be 
greater than 2 % 
of total assets, the 
loaning power of 
which the proposed 
limit would not 
increase 


New York 

Chicago 

St. Louis 


47 

17 

6 


29,919 

17,652 

7,791 


504 
53 

24 


30 
12 
10 


2 
2 



Total 


70 


55,362 


581 


52 


4 


Boston. . . 


52 

6 

5 

37 

30 

22 

11 

2 

7 

6 

5 

13 
13 
6 
5 
4 
5 
6 
5 
2 
3 
8 
4 


43,123 

4,326 

2,510 

25,134 

20,570 

15,533 

9,471 

1,230 

4,605 

5,216 

1,421 

14,542 

10,211 

5,600 

6,353 

2,969 

2,788 

2,951 

3,911 

1,447 

1,190 

4,288 

2,130 


9 

52 

32 

145 

48 

35 

21 

2 

52 

7 

24 

14 

27 

10 

6 

2 

4 

14 

31 

21 

3 

8 

6 


1 

17 
4 
38 
14 
11 
5 

2 
2 
1 
5 
12 
2 
1 

2 
2 
9 
4 

1 
2 


28 


Albany. ........ 





Brooklyn. 

Philadelphia .... 

Pittsburg 

Baltimore 

Washington. . . . 

Savannah 

New Orleans. . . . 

Louisville 

Houston. ...... 

Cincinnati ..... 

Cleveland ...... 

Detroit 

Milwaukee 

Des Moines. . . . 

St. Paul 

Minneapolis. . . . 

Kansas City 

St. Joseph. 

Lincoln 

Omaha 




1 

10 
16 
4 
2 
2 
4 
4 

5 
1 
1 
1 
3 
5 


3 
4 


San Francisco.. . 


2 


Total 


257 


191,519 


573 


135 


96 


Total all re- 
serve cities . . . 
Country 


327 
100 


246,881 
51,550 


1,154 
250 


187 
88 


100 
54 


Total.... 


427 


298,431 


1,404 


275 


154 



232 ESSAYS AND SPEECHES 

assets, scattered as they are throughout every section of 
the country, and consisting of the most diversified kinds 
of property, constitutes a most exacting and often perplex- 
ing part of the general duties of the office. 

During the past year efforts have been made to cut down 
the expenses of receiverships, and hasten the final liquida- 
tion of the trusts. An annual saving approximating $100,- 
000 has been effected by the reduction of the salaries of 
receivers and attorneys, to correspond with the gradually 
lessening assets consequent upon the progress of liquida- 
tion, and by the consolidation of various receiverships in 
the hands of fewer receivers. 

Including the receivers appointed to take charge of 
banks which have failed during the year, the total number 
of receivers now at work is one hundred and thirteen, a re- 
duction of fourteen since the last report of this office was 
issued. The books and remaining personal assets of eleven 
receiverships have been removed to Washington, and are 
managed by one receiver and two assistants, thus dispens- 
ing with ten receivers and five clerks, and resulting in other 
economies. These latter receiverships were of banks in the 
last stages of liquidation, with slow assets, of a nature 
which would involve serious loss at forced sale, or which 
were involved in unfinished litigation. Eight other re- 
ceiverships are in process of removal to this office, which 
will result in dispensing with nineteen receivers in all. 

With some marked exceptions, the experience of the 
office shows that the indifference of local receivers to the 
demands of the business of their trusts, has a tendency to 
grow, as the assets of the trust and their compensation di- 
minish; and the results of the policy of consolidations of 
trusts has thus far amply justified the steps taken. 



BANK-NOTE CURRENCY 233 

RULING AS TO SECOND ASSESSMENTS UPON STOCK- 
HOLDERS AND REBATE TO STOCKHOLDERS IN 
CASE OF INCORRECT ASSESSMENTS 

The practice of this office heretofore has been, when an 
assessment upon stockholders is once decided upon as the 
proper one to cover a deficiency in the assets of an insolvent 
bank and to reimburse depositors, to regard such levy as 
irrevocable and unchangeable, notwithstanding that fur- 
ther developments in the administration of a trust may 
demonstrate error in the assessment. This practice the 
Comptroller found, in many cases, to be inconsistent with 
the exact fulfillment of the law. 

If an ordinary trustee, representing two parties to a 
settlement, is charged with the collection of a debt for one 
from the other, and, after collecting the amount which he 
believed to be due, discovers afterwards that he has only 
collected half the amount really due, it is his unquestion- 
able duty to proceed once more to collect the unpaid bal- 
ance. In like manner, if such a trustee collects what he 
considers the amount of the debt, and discovers afterwards 
that he has collected twice the amount actually due, it is 
his unquestionable duty to return the half of the amount 
unjustly collected to the wronged party. No trustee, upon 
the discovery of his mistake in either instance, would be 
justified in claiming that his first action was final, and that 
he owed no further duty to the parties involved. 

The Comptroller, therefore, acting as trustee for the 
proper protection of the interests involved, cannot right- 
fully refrain from making second assessments against stock- 
holders, where the first assessment was too small, or refuse 
to return to stockholders a portion of their paid assess- 
ments, when they were made in the first instance, through 
error, in an amount larger than that allowed by law. 



234 ESSAYS AND SPEECHES 

An assessment is made against the stockholders of an in- 
solvent bank to cover the difference between the claims 
against it and the value of its assets. When the assessment 
is made after all the assets have been disposed of, there is 
little likelihood of mistake by the Comptroller and the re- 
ceiver in the fixing of the amount; but when the assess- 
ment is made prior to the final liquidation of the assets, as 
is generally the case, it is based upon the difference be- 
tween the claims and the amount which the Comptroller 
and the receiver estimate as the cash value of the assets, 
after deducting allowances for contingencies and expenses. 

The diversified nature, the location, the condition of the 
assets of insolvent banks are such that some errors in the 
appraisement of the Comptroller and receiver are inevita- 
ble and unavoidable. These errors if they exist are, of 
course, developed by the final liquidation of the trust. If 
the final liquidation develops that the total deficiency is so 
large that it would not have been covered by a fully paid 
assessment of 100 per cent upon the stockholders, and 
a 100 per cent assessment had already been declared, a 
former error in the estimate of the value of the assets 
would, of course, be immaterial; but, if the former assess- 
ment had been for a less amount than the 100 per cent, it 
is the Comptroller's plain duty, as trustee in the interest 
of the creditors for the collection of the legal liabilities of 
the stockholders, to make a second assessment for an 
amount which, with the former assessment, would equal 
the full stockholders' liability, to wit, 100 per cent. And 
thus, with any other error in deficient assessments, a sec- 
ond assessment should be made to cover the difference 
between the deficiency as estimated and the deficiency as 
developed by final liquidation. 

In like manner, when the estimate of the deficiency upon 
which the assessment was based proves to be too large, it is 



BANK-NOTE CURRENCY 235 

evident that the Comptroller has collected from the stock- 
holders a greater sum than that which the law gives him 
authority to collect, and it is his duty to return the excess 
to the contributing stockholders. 

There can be no reasonable dissent from these propo- 
sitions. In their practical application it will sometimes 
happen that a return of an illegally collected excess will be 
made to stockholders, and at the same time the creditors of 
the same bank will not have been paid in full. This arises 
from the fact that the Comptroller can assess against each 
stockholder, under the law, only that proportion of the 
total deficit which his stock bears to the total stock, irre- 
spective of whether or not, through the insolvency of some 
of the stockholders, a portion of the total deficit for which 
the assessment is made is uncollectible. 

There are at present in the Comptroller's hands eight 
insolvent banks where a revision of the former assessment 
is necessary. In three of these a second assessment against 
stockholders, in the interest of depositors, has been made, 
and in five cases a rebate in assessments collected will be 
returned to stockholders. 

The Comptroller reproduces here a portion of the hold- 
ing of the United States Supreme Court and the original 
ruling made by the Comptroller thereunder, May 5, 1898, 
as more fully explaining the principles and methods in- 
volved: — 

In the case of the United States v. Knox (102 U.S. 425), the 
court uses the following language in outlining the process to be 
pursued in fixing the separate liability of the shareholders : — 

"In the process to be pursued to fix the amount of the separate 
liability of each of the shareholders, it is necessary to ascertain 
(1) the whole amount of the par value of all the stock held by all 
the shareholders; (2) the amount of the deficit to be paid after 
exhausting all the assets of the bank; (3) then to apply the rule 
that each shareholder shall contribute such sum as will bear the 



236 ESSAYS AND SPEECHES 

same proportion to the whole amount of the deficit as his stock 
bears to the whole amount of the capital stock of the bank at its 
par value. There is a limitation of this liability. It cannot in the 
aggregate exceed the entire amount of the par value of all the stock. 

"The insolvency of one stockholder, or his being beyond the 
jurisdiction of the court, does not in any wise affect the liability 
of another; and if the bank itself, in such case, holds any of its 
stock, it is regarded in all respects as if such stock were in the 
hands of a natural person, and the extent of the several liability 
of the other stockholders is computed accordingly." (Crease v. 
Babcock, 10 Met. (Mass.) 525.) 

The court further says: "Although assessments made by the 
Comptroller under the circumstances of the first assessment in 
this case, and all other assessments, successive or otherwise, not 
exceeding the par value of all the stock of the bank, are con- 
clusive upon the stockholders, yet, if he were to attempt to 
enforce one made clearly and palpably contrary to the views we 
have expressed, it cannot be doubted that a court of equity, if 
its aid were invoked, would probably restrain him by injunction.'* 

The Supreme Court of the United States having thus 
determined the basis upon which, under the law, the 
Comptroller fixes the amount of the assessment to be 
levied against the shareholders of an insolvent bank, no 
other course is proper than a reconsideration of the ques- 
tion of the amount of the deficiency when the matter is 
brought before him upon complaint of either depositors 
or stockholders, or where an error becomes manifest to him 
in the course of the further administration of the trust. 

The position of the Comptroller in his relations to the 
stockholders is that of a trustee for the collection, in the in- 
terest of the creditors, of all the legal liabilities of the stock- 
holders under the statute, as further defined by the courts. 

In pursuance of this duty as trustee, when upon further 
administration of the trust, an error in a former assess- 
ment is demonstrated in estimating the deficiency in the 
assets of the trust at too small an amount, it will become 



BANK-NOTE CURRENCY 237 

the duty of the Comptroller to review the former action, 
and, if necessary, to levy an additional assessment upon 
the stockholders of the insolvent bank, for the purpose of 
collecting from each stockholder that proportion of the 
difference between the estimated and the actual deficiency 
which the stock of the individual stockholder bears to the 
total stock of the bank. 

If, in the endeavor to enforce such liability through an 
error as to the exact deficiency, there is collected a greater 
amount from the shareholders than that for which they are 
legally liable, the Comptroller then becomes trustee for 
the stockholders who have paid such excess, charged with 
the return of said excess to the contributing stockholders 
in the proportion. in which they have paid their original 
assessment to him. The determination of the amount to 
be returned to such stockholders must necessarily be de- 
ferred until the final closing of the trust, an amount being 
reserved at all times in the hands of the Comptroller suf- 
ficient to afford full protection to said contributing share- 
holders against any contingency of change in the amount 
collected from the assets, over the estimated value of as- 
sets at the time of assessment. 

The following illustrations taken from the records of the 
office show the application of the ruling : — 

In the case of the El Paso National Bank, El Paso, 
Texas, an assessment of 35 per cent on the $150,000 of 
capital stock was levied December 26, 1894. After all the 
assets had been liquidated, it appeared that if the whole 
amount of the assessment, $52,500, had been collected, a 
deficiency of $28,500 still existed, for which the share- 
holders were liable, and on May 6, 1898, an accounting hav- 
ing been made by the receiver, the individual liability of 
the shareholders was further enforced by an assessment of 
19 per cent on the capital stock. 



238 ESSAYS AND SPEECHES 

The process of ascertaining the deficiency is exemplified 
in the following statements of the liabilities and resources 
of the bank : — 

Liabilities 

Claims at date of suspension $263,088.00 

Claims established since suspension 21,568.57 

Total claims $284,656.57 

Expenses: 

Amount paid for betterment of assets $9,134.35 

Receiver's salary 12,749.75 

Legal expenses 3,444.97 

General expenses 6,547.55 31,876.62 

Interest at 6% from date of suspension to De- 
cember 31, 1898: 

On $161,947.45 claims proved $34,600.19 

On $2,914.46 liabilities not proved 881.62 35,481.81 

Estimated expenses to date of final closing 

December 81, 1898 2,000.00 

Total liabilities $354,015.00 

Resources 

Collections from all resources, exclusive of $13,650 collected 

from assessment of 35 per cent upon shareholders $229,094.70 

Offsets allowed against liabilities 43,808.28 

Assessment of 35 per cent upon shareholders 52,500.00 

Total resources $325,402.98 

Remaining deficiency of assets $28,612.02 



Or by the following statement of the liabilities and re- 
sources, the same result is obtained : — 



Liabilities 

Claims proved $161,947.45 

Liabilities not proved 2,914.46 

Interest at legal rate from date of suspension to December 

31, 1898, on proved claims 34,600.19 

On liabilities not proved 881.62 

Estimated expenses of receivership to date of final closing . . 2,000.00 

Total liabilities $202,343.72 



BANK-NOTE CURRENCY 



239 



Resources 

Cash on deposit in United States Treasury $95.02 

Collections from assets, representing dividends paid to credi- 
tors on $161,947.45 proved claims 121,136.68 

Assessment, 35 per cent, upon shareholders 52,500.00 

Total resources $173,731.70 

Remaining deficiency of assets $28,612.02 

In the case of one national bank, in which an assessment 
of 70 per cent had been levied upon its capital stock of 
$60,000, it has been ascertained that an assessment of 32 
per cent, if paid in full, would have been sufficient, in 
connection with the collections from the assets, to pay its 
liabilities, and that $6856 of the amount collected from the 
shareholders, in excess of the amount that would have been 
payable on the basis of an assessment at the latter rate, is 
returnable to them in the following proportions, numbers 
being used to indicate the shareholders who have paid the 
assessment of 70 per cent in whole or in part. 



No. of 
claim 


No. of 
shares 


Amount 

of capital 

stock 


Assessment 
of 70% on 
capital stock 


Amount 
collected in 
cash on 
70% as- 
sessment 


Assessment 
32%, represent- 
ing actual defi- 
ciency of assets 


Amount of 
overpayment on 
basis of 32% 

assessment 


1 

2 

3 

4 

5 

6 

7 

8 

9 

10 

11 


10 
7 
5 

10 
1 

10 

5 

100 

2 

60 
2 


$1,000 
700 
500 

1,000 
100 

1,000 

500 

10,000 

200 

6,000 
200 


$700 
490 
350 
700 
70 
700 
350 

7,000 
140 

4,200 
140 


$700 
490 
350 
700 
70 
700 
350 

7,000 
140 

3,000 
140 


$320 

224 

160 

320 

32 

320 

160 

3,200 

64 

1,920 

64 


$380 

266 

190 

380 

38 

380 

190 

3,800 

76 

1,080 

76 


Total 


212 


$21,200 


$14,840 


$13,640 


$6,784 


$6,856 



All assets of the bank having been liquidated,the amount 
for which the shareholders should have been assessed to 



240 ESSAYS AND SPEECHES 

meet the deficiency was $19,200, instead of $42,000, as will 

appear from the following statement of its liabilities and 

assets : — 

Liabilities 

Claims proved, upon which 60 per cent in dividends have 

been paid $28,695.18 

Claims not proved, as shown by the books 565.58 

Interest on above claims to date 6,793.51 

Total liabilities $36,054.27 

Assets 

Cash on deposit in the United States Treasury $5,376.20 

Collections from assets representing dividends 60 per cent on 

$28,695.18, claims proved 11,478.07 

Total assets $16,854.27 

Deficiency of assets $19,200.00 

Assessment, 32 per cent on $60,000 capital stock. . . $19,200 

Assessment, 70 per cent on $60,000 capital stock. . . 42,000 

Excess over amount of actual deficiency $22,800 

Amount collected on 70 per cent assessment. ...... $13,640.00 

Proportionate amount that would have been col- 
lected on 32 per cent assessment 6,784.00 

Amount collected on 212 shares of stock in ex- 
cess of 32 per cent assessment $6,856.00 

DOMESTIC BRANCH BANKING 

The Comptroller recommends, in accordance with former 
recommendations of his predecessor, that domestic branch 
banking should be legalized in communities of less than 
two thousand inhabitants, many of which are now unable 
to support independent banks. This would afford some 
smaller communities banking privileges which are now 
without them, but would not materially interfere with the 
scope of the work now so well performed by the existing 
banks of the smaller communities. 

The main arguments which are advanced in favor of the 



BANK-NOTE CURRENCY 241 

granting of more liberal privileges of branch banking than 
this are based largely upon the theory that with branch 
banking allowed in all communities, irrespective of size, 
more uniform interest rates would prevail throughout the 
country, and the flow of capital to points of scarcity would 
be facilitated. 

Such privileges would place the larger banks of the great 
cities in competition with the banks of smaller communi- 
ties, and would probably result in a rapid centralization of 
the banking business of the country in the hands of a con- 
stantly lessening number of institutions. Theoretical ad- 
vantages are claimed for such results, but in our judg- 
ment they would be injurious to the best interests of our 
country. 

Such a system would increase the difficulties in the way 
of the small borrower, though lessening them for the large 
borrower. It would tend to separate the borrower from the 
lender, as it would of necessity remove the central lending 
power from the small borrowers of small communities. 

It may be claimed that the agents in charge of the branch 
banks would possess the same powers of loaning as the 
officers of the smaller banks now possess; but such argu- 
ments ignore the prevailing tendencies of modern corpo- 
rate management, which magnify of necessity central re- 
sponsibility, and constantly tend to subordinate to rigid 
systems the activities and responsibilities of agents upon 
detached duty. 

The opportunities for individual attention and accom- 
modations to bank customers of limited business are now 
well subserved by competing small banks. Interest rates 
are not alone dependent upon local money supply; they 
also depend upon the risk of loss assumed in loaning. 
Branch banks in newer communities would not assume 
unusual risks, without unusual rates. The facilities now 



242 ESSAYS AND SPEECHES 

afforded by the thirty-six hundred national banks of the 
country for the movement of capital toward points of 
scarcity are such that any new system would probably not 
result in great changes in the general rates of interest. 
But when the economic tendencies adverse to business in- 
dividualism involved in unlimited domestic branch bank- 
ing are considered, the question of interest rates becomes 
secondary. 

FOREIGN AND COLONIAL BRANCH BANKING 

In the matter of foreign and colonial branch banking, 
however, different considerations, arising from different 
conditions, present themselves. 

The subject of the legislation which should be provided 
by Congress for the regulation of the domestic banking of 
the new colonies of the United States, and for the defining 
and regulation of the banking relations between these col- 
onies and the United States, is one of greatest importance 
at this juncture of our national and commercial career. 
This legislation is not only most essential to the welfare of 
the people of the new territories, but to the people of the 
United States as well. 

The foundation for the greater growth of trade between 
the United States and her colonies must be speedily and 
firmly laid in proper banking laws which will result in en- 
abling her merchants to do business with the people of the 
colonies without the disadvantages existing at present. 

The lamentable lack of proper international banking 
facilities, under which the merchants of the United States 
have so long labored, has now become a serious hindrance 
to the speedy adjustment of our trade relations to the new 
advantages afforded by territorial expansion. For years 
before the outbreak of the war with Spain the necessity 
of providing proper banking facilities for our trade with 



BANK-NOTE CURRENCY 243 

South American countries had been recognized and widely 
proclaimed by the business interests of the country. These 
facilities are now not only more important than formerly to 
our business interests, but at present governmental as well 
as trade necessities demand legislation. 

In April, 1890, the International American Congress, 
held at Washington, discussed the needs of better banking 
facilities between the American republics, and made rec- 
ommendations in connection therewith which received the 
indorsement of President Harrison and Mr. Blaine, the 
Secretary of State. In furtherance of this object several 
bills have been favorably reported from the Committee 
on Banking and Currency of the House. As yet, however, 
these efforts, made in the interest of trade stimulation, 
have not resulted in the enactment of law. Our present 
national banking laws do not authorize the establishment 
of American international or American intercolonial banks, 
nor could any national bank establish a branch in a territory 
or colony such as Porto Rico or Hawaii, even if our present 
laws unchanged were extended over it. 

While it is questionable whether Congress should legal- 
ize the establishing of foreign or colonial branches by na- 
tional banks transacting business under the present law, 
that it should at least pass laws authorizing, under proper 
restrictions, the general incorporation of banks organized 
to carry on international and intercolonial banking, as dis- 
tinguished from domestic banking, admits of no reasonable 
doubt. 

Unless some such legislation is provided, the American 
exporter and importer, in his trade with America's own 
colonies, will be compelled to endure all the disadvantages 
under which, in all South American markets, and in many 
other markets of the world, he now labors in his competi- 
tion with foreigners enjoying superior banking facilities. 



244 ESSAYS AND SPEECHES 

When, by means of international banks and their 
branches, the proper banking facilities are afforded those 
engaged in foreign trade, they transact their business with 
these banks in much the same manner as the domestic 
shippers of the United States transact business with our 
present banks. 

The American, in his South American trade, as com- 
pared with the foreigner in the same line of business, is 
subjected to the same relative disadvantages as are expe- 
rienced by a domestic shipper without banking facilities, 
as compared with another who possesses them. 

Domestic dealers in supplies, in good credit, may make 
contracts with domestic wholesale purchasers in good 
credit, for the sale and shipment of goods, for which the 
consignee gives his acceptance, payable at different inter- 
vals, sometimes months after the delivery to him of the 
shipment. The consignor discounts this accepted draft, 
given him for the goods, with his bank, thus receiving his 
capital at once for reinvestment, and enabling him to 
transact a larger business than if the capital invested in 
the goods was locked up until the maturity of the accept- 
ance. On the other hand, the consignee has the difference 
between the time of the arrival of the shipment and the 
maturity of the draft to sell the goods, and to collect from 
the purchaser all or a portion of the amount necessary to 
pay the draft. 

The situation of the shipper without banking facilities is 
in sharp contrast. He must ordinarily sell for cash, instead 
of on credit, to the consignee, as he needs his capital in 
most cases for immediate reinvestment. As a result, in his 
competition with his more favored rivals, he is not only 
compelled to accept lower prices, involving smaller mar- 
gins of profits, but he must do a smaller business on the 
same capital invested. 



BANK-NOTE CURRENCY 245 

Thus, compared with the English exporter, who, when 
his goods are shipped, can receive advances from an English 
international bank upon the credit of his bills of lading 
and of the foreign consignee, concerning whose credit the 
home bank, through its foreign branch, is well advised, the 
American shipper, in the majority of instances, is denied 
such privileges, and must await entire, instead of partial, 
reimbursement until the arrival of the goods at the foreign 
market and the collection of the draft for the purchase 
price made at the time of shipment. 

In addition to this disadvantage, the American exporter 
and importer, in his trade with South American countries, 
transacts all his business of consequence through English 
banks in terms of English money, paying the rates of ex- 
change fixed by these foreign institutions. 

The foreign branches of American international and in- 
tercolonial banks would obviate many of these difficulties, 
and would become themselves valuable mediums of intro- 
duction of American enterprise into colonial and foreign 
fields. 

The present situation of trade and finance in Porto Rico 
is deplorable. Credit in business is sparingly used, and 
under most primitive and exacting conditions. While 
some lines of credit through foreign connections are ex- 
tended to those engaged in the import and export busi- 
ness, no credits of consequence are extended to this class of 
trade by Porto Rican banks. The primitive conditions and 
disadvantages under which business has heretofore been 
transacted in Porto Rico have prevented the establish- 
ment of Porto Rican branches by foreign banks, and under 
the new era the American banker, in entering this field, 
will not have the competition of a long established branch 
bank business, such as exists in most South American 
countries. That this will prove to be an advantage to 



246 ESSAYS AND SPEECHES 

American interests from one standpoint admits of little 
doubt, provided that new banking laws are framed by Con- 
gress authorizing the establishment of international and 
intercolonial banks, which can perform those numerous 
and indispensable offices in the facilitation and extension 
of business between the States and the colonies, which 
domestic banks now perform in the interest of business 
between the citizens of the States themselves. 

The present banking business, in connection with Amer- 
ican trade in Porto Rico, is done mainly through one house 
with a New York branch. This firm of bankers has as 
agents various commercial houses in different parts of 
Porto Rico. Commission merchants are now transacting 
almost the entire business of this country with Porto Rico. 
They represent the merchants of the island, and secure 
or furnish them credit, receiving commissions for their 
services. Thus the credits granted in connection with the 
export and import business of the island are almost wholly 
by commission men. With proper banking facilities, and 
after the final establishment of a fixed rate of exchange be- 
tween the present Porto Rican coin and our own money, 
this country should control almost the entire trade of all 
kinds in the island. 

The determination of the relation of any new banking 
system, to the existing banks and domestic credits of Porto 
Rico, differing as they do from those of this country, in- 
volves many difficult questions; and legal provision for the 
appointment of a commission, especially charged with the 
examination of the conditions of domestic banking and 
finance on the islands and with the recommendation of the 
proper form of laws in connection therewith, is respect- 
fully urged upon Congress. 

In Hawaii, business conditions are far different. The 
four commercial banks of Honolulu have adopted largely 



BANK-NOTE CURRENCY 247 

American methods; and the customs of general business 
are now American to such an extent that the present Na- 
tional Banking Act might well be extended over the island, 
so far as its domestic banking is concerned. While the pres- 
ent banks, with their correspondents in the United States, 
now provide reasonably well the exchange and other credits 
necessary to accommodate the business between the island 
and the United States, the establishment of intercolonial 
banks under new laws of Congress would probably be found 
of advantage to existing trade relations. 

In view of the conditions and necessities of our trade 
with our new Territories of Porto Rico and Hawaii, and 
with other South American countries as well as with those 
other territories over which our country must exercise a 
more or less extended control, the Comptroller earnestly 
recommends the passage of laws authorizing the incor- 
poration of banks, organized for the purpose of carrying 
on international and intercolonial branch banking. 



RECOMMENDATIONS RELATIVE TO 
BANK-NOTE CURRENCY 

{From Report as Comptroller of the Currency, 1899) 

There is one reform needed in the bank-note currency 
of the United States, concerning the general principle of 
which there seems little room for honest controversy. This 
is a provision for an emergency circulation which can be 
used in those seasons of the year in which the moving of 
crops requires an increase in the circulating medium, and to 
lessen the disastrous effects of the immense liquidation of 
credits incident to a financial panic. The widespread ruin 
and misery affecting all classes of citizens and all kinds of 
business, which results from an industrial and financial 
panic, is such that any measure designed to forestall or to 
lessen its destructive power should properly demand the 
highest degree of consideration. A time of active com- 
merce and normal financial conditions such as we are enjoy- 
ing at present is most opportune for the deliberate and care- 
ful discussion of measures which, if adopted now, may in a 
measure relieve the embarrassments above indicated and 
the keenness of the distress of commercial and industrial 
interests incident to such panics as those of 1873 and 1893. 

It is true that the enactment of legislation, by which the 
credit of our governmental currency may be protected from 
the effects of deficient revenues and from the influences of 
commercial panic, is important as a measure of govern- 
mental policy at this time. The panic of 1893 and an 
ensuing period of deficiency in governmental revenue de- 
monstrated that fact; but they likewise demonstrated the 
necessity of circulation of some nature by the banks which 



BANK-NOTE CURRENCY 249 

could be used to supply the demands during such an ex- 
treme emergency for a liquidating medium whose existence 
would tend to protect solvent institutions of all kinds from 
forced bankruptcy resulting from a money panic. The ob- 
ject of such a circulation is neither to provide profits to the 
banks nor to serve as a basis for the expansion of commer- 
cial credits under normal conditions. It would be to the 
country at large what the clearing-house certificates have 
proved to be in times of panic in some of our larger cities. 

The necessity for such circulation, designed for the mu- 
tual protection of banks and the public in times of panic 
and money stringency, and so heavily taxed as to compel 
its retirement after the period of acute demand for money 
is passed, is made clearer by a reference to conditions 
prevailing in 1893. 

The deposits of the national banks of the country be- 
tween May 4 and October 4, 1893, were reduced in the sum 
of $378,767,691; the contraction in balances on deposit 
with other banks was $51,198,856; the contraction in 
stocks and securities was $2,177,912. The banks took out 
$31,265,616 of new circulation and borrowed $36,615,092 
in their efforts to meet the general demands upon them. As 
a matter of fact, the necessary delay incident to printing 
national bank-notes by the Government after receiving the 
order for circulation by the banks, amounting on the aver- 
age to twenty-five days, prevented the issuance of a larger 
circulation at this time, the acute crisis having passed by 
the time the notes were ready for delivery, and the order 
for the notes canceled by the banks in consequence. 

The amount of orders canceled for this cause during the 
period above named is estimated at $11,000,000. Even 
with the aid of this additional circulation and borrowing, 
the national banks of the country, to meet this drain in 
deposits, were compelled to contract their loans during 



250 ESSAYS AND SPEECHES 

this period in the sum of $318,767,691, taking this immense 
amount from the productive industries of the country and 
carrying disaster, not only to employer and employee, but 
to every class of our citizens. 

The records of this office show that with our banking 
system as a whole the money stringency incident to a finan- 
cial panic is soon over. At most it is a matter of but a few 
months. The crisis of a panic once passed, the arrested 
wheels of general business start moving very slowly, and 
the unproductive and unloaned capital of the country stag- 
nates in the banks. In May, 1893, during the panic, the 
average reserve of the banks of the United States was 26.4 
per cent, and in December, 1893, 35.7 per cent. In May, 
1893, the banks of New York City held in reserves of only 
28.5 per cent, and in December, 1893, they held 41.2 per 
cent, or $66,663,000 above the required legal reserve of 25 
per cent. 

The facts prove that emergency circulation which could 
be used to lessen the disastrous effects of the liquidation 
incident to an industrial and bank panic would be needed 
for but a few months, and would not remain as a disturbing 
and unusual factor in business long after its time of max- 
imum influence. 

In connection with the recommendations which he em- 
bodies hereafter, the Comptroller repeats the recommenda- 
tion made by him in his last Report to Congress, to wit : — 

For the purpose of allowing elasticity to bank-note issues to 
protect the banks and the community in times of panic, a small 
amount of uncovered notes, in addition to the secured notes, 
should be authorized by law under the following limitations: 
They should be subjected to so heavy a tax that they could not be 
issued in normal times for the purpose of profit, but would be 
available in times of emergency. The tax should be so large upon 
the solvent issuing banks as to provide a fund, which, in connec- 
tion with the pro-rata share of the assets of an insolvent bank, 



BANK-NOTE CURRENCY 251 

would be sufficient to redeem the notes in full, without necessitat- 
ing any preference of note-holders over depositors of any insolvent 
issuing bank. The tax should be so large as to force this currency 
into retirement as soon as the emergency passes. Such a currency 
could be used only to lessen the evil effects of the too rapid liqui- 
dation of credits which are collapsing under a financial panic, but 
could not be profitably used as a basis of business speculation and 
inflation. It should be to the business community what the clear- 
ing-house certificates are to our cities in times of panic — a rem- 
edy for an emergency, not an instrument of current business. 

In view of the fact that our national banking system is 
composed of over thirty-six hundred separate institutions 
scattered throughout our great country and surrounded by 
diversified business conditions, the problem of the enact- 
ment of such a law, involving as it does a departure to some 
extent from the principle of a bond-secured circulation, 
presents grave difficulties, arising partly out of the natural 
conservatism of our people and from the fact that the plan 
will be somewhat experimental. That such a law providing 
for the protection of the business community shall be ulti- 
mately passed is of great importance. A marked degree of 
elasticity, however, is possible of attainment in connection 
with our present system of bond-secured national bank- 
notes. 

The Comptroller believes that, in accordance with the 
President's recommendation, national banks should be 
allowed to issue circulation to the par of the United States 
bonds deposited by them for circulation, and that, in con- 
nection with the law authorizing this, provision can be 
made for a secured emergency circulation. The object of 
allowing banks to take out circulation to the par of the 
bonds is to induce them to furnish for the use of the public 
a larger amount of circulation than is in existence at pres- 
ent. The present rate of profit to be derived by the banks 
from their circulation is not sufficient to justify them in 



252 ESSAYS AND SPEECHES 

offering a larger amount, but any method of increasing the 
profits on circulation will result in an increase. 

It is true that the authorization of an issue of currency 
to the par of the deposited bonds, subject to the present 
rate of tax, is one method of inducing a larger circulation, 
but it is not the only method. By a modification of the 
present rate of taxation on bank-notes, coupled with the 
authorization of issues to the par of the bonds, the same 
inducements can be offered for a larger circulation and yet 
provision be made for a secured emergency circulation. 

The Comptroller, therefore, would recommend legisla- 
tion authorizing the issuance of national bank-note circu- 
lation to the par of the deposited United States bonds, and 
that the additional ten per cent circulation thus allowed 
the banks be subjected to a tax at the rate of two or three 
per cent per annum for the time used, which will tend to 
prevent its unrestricted use under normal conditions, and 
to save it for use at those periods of the year when crops 
are to be moved, and in those periods of panic when it is 
most valuable both to the banks and the business public 
as a means of assisting the general liquidation of credits. 
With the object of securing an increase in the present bank- 
note circulation, he would recommend the reduction or 
abolishment of the present tax of one per cent per year on 
the circulation to ninety per cent of the deposited bonds — 
the amount of the reduction in the tax on currency to be 
collected from the necessary percentage of tax on the capi- 
tal and surplus of national banks if requisite to the public 
revenues. To allow the banks to issue up to the par of the 
bonds, unsubjected to additional tax on the ten per cent 
extra circulation, will result in their immediately taking 
out their additional circulation for the purpose of profit. 
Business credits will be extended and adjusted to corre- 
spond with such increase of the currency, and practically 



BANK-NOTE CURRENCY 253 

the same inelasticity will characterize our bank-note issues 
then as now. With the advent of a panic we would have no 
additional means of lessening the necessity of a call upon 
the business community to furnish, by the repayment of 
loans, practically the bulk of the deposits drawn by fright- 
ened depositors. 

It will be seen from an examination of the calculations 
given hereinafter that exactly the same rate of profit could 
be realized by the banks upon circulation to ninety per cent 
of the bonds deposited, taxed at four ninths of one per cent 
per annum, as they could realize upon circulation to the par 
of the bonds at the present tax of one per cent. 

It will also be seen that if the tax on the ninety per cent 
of circulation should be entirely abolished, or shifted to the 
franchise of banks, that the profit on circulation would be 
much larger than could be realized upon circulation issued 
to the par of the bonds subjected to the present tax. 

This rate of profit to be realized upon untaxed circulation 
issued to ninety per cent of the bonds would be so large 
that upon circulation issued to the par of the bonds it 
would be necessary to reduce the tax down to three fifths 
of one per cent before an equal profit upon par circulation 
could be made. 

It will also be noted that exactly the same rates of profit 
could be made upon ninety per cent circulation taxed one 
sixth of one per cent as could be made upon par circulation 
taxed three fourths of one per cent. 

In the judgment of the Comptroller these tables show 
conclusively that by modification in forms of taxation the 
same relative increase in general bank-note circulation, 
with an emergency circulation in addition, can be obtained, 
while only an increase without any elasticity could be 
obtained under any system of uniform taxation upon par 
circulation.. 



254 ESSAYS AND SPEECHES 

For the purpose of indicating that within the range of the 
possible modification of taxation on a circulation to ninety 
per cent of the bonds, provision can be made for an emer- 
gency circulation of ten per cent to the par of bonds, while 
amply encouraging the increase in general note circulation 
desired, the Comptroller summarizes the result of calcula- 
tions given more in detail hereafter. 

Profit in dollars upon circulation issues against a deposit of $100,- 
000, government 4- V er cen t bonds maturing in 1907, at present 
price, being the possible amount to be realized under different rates 
of taxation in addition to 6 per cent on the capital invested in 
bonds, with money worth 6 per cent 

On $90,000 circulation, being 90 per cent of $100,000 bonds, 

1 per cent tax on circulation under present laws $279.88 

On $100,000 circulation to par of bonds, uniform 1 per cent tax . . 779.88 

On $90,000 circulation to 90 per cent of bonds, taxed four ninths 
of 1 per cent, making possible an issue of $10,000 emergency 
circulation, to be taxed at the rate of 2 or 3 per cent for the 
time issued 779.88 

On $100,000 circulation to par of bonds, uniform tax of three 

fourths of 1 per cent 1,029.88 

On $90,000 circulation to 90 per cent of par of bonds, taxed one 
sixth of 1 per cent, making possible an issue of $10,000 emer- 
gency circulation, to be taxed at the rate of 2 or 3 per cent for 
the time issued 1,029.88 

On $100,000 circulation to par of bonds, uniform tax of three 

fifths of 1 per cent 1,179.88 

On $90,000 circulation to 90 per cent of par of bonds without 
taxation, making possible an issue of $10,000 emergency cir- 
culation to be taxed at the rate of 2 or 3 per cent for the time 
issued 1,179.88 

In the foregoing figures no profit is calculated as accruing 
upon the emergency circulation. 

The Comptroller believes that the levying of a tax of one 
sixth of one per cent upon circulation to ninety per cent of 
the par of the bonds and allowing the banks to issue cur- 
rency to the par of bonds by paying a tax at the rate of two 
or three per cent per annum on the excess up to the par 
when outstanding, will result in the desired increase in our 



BANK-NOTE CURRENCY 255 

general bank-note issues, and provide a marked degree of 
elasticity in our circulation. 

In this connection the Comptroller cannot properly dis- 
cuss the question of taxation of banks as related to the pub- 
lic revenues further than to say that the imposition of a tax 
upon the capital and surplus of the banks to offset any 
reduction in the tax on currency will remove any objection 
to his recommendation on the grounds that it lessens the 
share of the public burden which the banks should properly 
bear. 

In considering the probable effect on the amount of bank 
circulation outstanding which will result from a change in 
rates of taxation it must be remembered that the calcula- 
tion would properly include, if it could be safely made, an 
estimate of the increased price of government bonds, which 
will probably be incident to a greater demand for these 
bonds from the banks seeking profit on circulation under 
the modified rate of taxation. 

This increased price of bonds may be such as to negative 
to some degree the desired effect of an increased bank-note 
circulation, since it will tend to lessen the profits on circu- 
lation. It must be remembered, however, that this objec- 
tion can be made to any method of increasing the apparent 
profits on bank-note circulation, including the method of 
authorizing issues to par, subject to a uniform tax. 

The Comptroller believes that from the passage of laws 
altering, as suggested, the rate and method of taxation of 
national bank-notes, an increase of at least $100,000,000 
may reasonably be expected. 

Based upon our present bond-secured bank-note cir- 
culation, which amounts to about $207,000,000 and 
this added amount, we would have, under such laws, an 
available bond-secured emergency circulation of at least 
$30,000,000. 



Q56 ESSAYS AND SPEECHES 

As a summary of his views on this subject, the Comptrol- 
ler would call attention to the following propositions : — 

First. Whether or not legislation be passed providing for 
an uncovered emergency circulation for needed protection 
from the disastrous effects of panics, a very much larger 
degree of elasticity can be imparted to our present bond- 
secured bank-note currency, thus making it of greater use 
in seasons of the year in which the demand for currency is 
above the normal, and of invaluable assistance in times of 
panic. 

Second. This result can be obtained by the enactment 
into law of the President's recommendation that national 
banks be allowed to issue to the par of the government 
bonds deposited by them as security, and by the modifica- 
tion of the present tax upon national banks as follows : — 

After determining approximately the lowest rate of pro- 
fit which will call into circulation the additional amount of 
national bank-notes deemed necessary for public conven- 
ience, this rate of profit should be reached by lessening 
or shifting to the franchise of banks the present one per 
cent tax on circulation to ninety per cent of the par of the 
government bonds securing it. A tax of two or three per 
cent should then be levied on the excess of circulation over 
ninety per cent of the bonds, which will make of such ex- 
cess circulation a secured emergency circulation only to be 
used when it becomes a public necessity, and not as a 
means of profit by the banks under normal conditions. 

The general increase in bank circulation desired being 
possible of attainment through the lowering of the tax on 
the ninety per cent circulation, this additional tax on the 
ten per cent excess circulation to the par of the bonds will 
not materially interfere with such general increase, and 
will only operate to create an emergency circulation of 
great value. 



BANK-NOTE CURRENCY 257 

Third. As the use of rediscounts and bills payable on the 
part of the Western and Southern banks at certain seasons 
of the year is regarded as evidencing the need of an elastic 
circulation, and as bearing upon the question of the meas- 
ure of relief which may be expected from the bond-secured 
emergency circulation here recommended., the Comptroller 
will state that without any general increase in bank-note 
circulation as a result of new legislation, the possible emer- 
gency circulation of $20,000,000 immediately available, 
based on bonds securing the present circulation, amounts 
to more than the combined bills payable and rediscounts of 
all the national banks of the United States outstanding at 
any time within the last three years. 

If the Comptroller's estimate of a possible bond-secured 
emergency circulation of $30,000,000 be correct, this 
amount is about double the average combined bills payable 
and rediscounts of the entire national system outstanding 
within that period. 

As the elastic and uncovered issues of the joint-stock 
banks of England, Scotland, and Ireland, comprising all 
the uncovered bank-notes there issued, may be cited as 
illustrating the advantages of an elastic circulation, the 
Comptroller would also call attention to the fact that these 
entire issues are but a small amount more than the $20,- 
000,000 bond-secured emergency circulation which would 
be immediately available on existing bond deposits in the 
United States under the legislation recommended. And 
with an increase in general bank-note circulation, resulting 
from modified laws, we would probably have a bond- 
secured emergency circulation in this country larger than 
the emergency circulation of the joint-stock banks of Eng- 
land, Scotland, and Ireland, which is secured only by the 
general assets of the banks, without preference over other 
creditors. 



258 ESSAYS AND SPEECHES 

Fourth. Even if a special uncovered emergency circula- 
tion be provided, to be used only in case of panics, the 
plan here suggested of changing the taxation and issues of 
secured bank-notes will afford an elastic circulation of value 
in times of money stringency not approaching the severity 
of a panic. With or without the legislation for the special 
uncovered emergency circulation, the bond-secured emer- 
gency circulation will be of great public use. 

Fifth. If provision be made for an uncovered emergency 
circulation for use in times of panic, subject to a tax so 
large as to be repressive at all other times, the ten per cent 
bond-secured emergency circulation herein recommended 
might be taxed at the rate of two per cent per annum for 
the time issued instead of at the rate of three per cent, thus 
allowing its freer use under more normal conditions. But if 
no uncovered circulation for panics be provided, the more 
repressive tax of three per cent seems desirable upon the 
bond-secured emergency circulation. 

Sixth. There is no need, under normal conditions, of a 
large amount of emergency circulation or a high degree of 
elasticity in bank-note circulation. The immense volume 
of checks, drafts, and bills of exchange, based upon the 
assets of banks and often called bank-credit currency, ex- 
pands and contracts in accordance with the demand of 
trade and business, and is the medium through which the 
great bulk of the business of our country is transacted. It is 
extremely elastic, and varies in amounts at different sea- 
sons of the same year. It is generally amply adequate to 
the business needs of the country, except in times of dis- 
turbed confidence and financial panic. 

Seventh. The issuance of bank-asset notes under normal 
conditions and in the present development of our bank- 
ing system cannot be justified by the plea that without 
them the needed elasticity of bank-note currency cannot 



BANK-NOTE CURRENCY 



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260 ESSAYS AND SPEECHES 

be obtained. Nothing except the avoidance of panic can at 
present justify any experiments with bank-asset currency. 
When authorized for use in times of panic the notes should 
be so heavily taxed that they can circulate only while a 
panic lasts, and like clearing-house certificates should be 
a remedy simply for a rare emergency. 

REPEAL OF SECTION 9 OF ACT OF JULY 12, 1882 

Section 9 of the Act of July 12, 1882, prohibits the in- 
crease of bank circulation within six months after the de- 
posit of lawful money to reduce circulation. The repeal of 
this section is necessarily precedent to any reform in na- 
tional banking currency which provides for a greater elas- 
ticity, and is recommended. A plethora of money leads the 
banks to retire their currency, and when a money strin- 
gency afterwards occurs there should be no unnecessary 
obstructions to an increase by the banks of their note 
issues, then doubly important to the needs of the business 
community. 

REMEDY FOR DELAY IN FILLING ORDERS FOR 
BANK-NOTE CURRENCY 

The Comptroller would respectfully call attention to the 
very great importance of an appropriation to increase the 
size of the vaults for the storage of incomplete national 
bank currency in this Bureau in order to enable it to re- 
spond to the demand of the banks and the business com- 
munity for circulating notes in case of sudden need. With 
the present inadequate facilities for storage, a sufficient 
amount of incomplete currency cannot be kept on hand, 
and as it requires from twenty-five to thirty days to com- 
plete an order received from a bank for bank-note plate 
printing, the public and the banks are frequently put to 
great inconvenience by this necessary delay. In the panic 



BANK-NOTE CURRENCY 261 

of 1893 the suffering and damage to which the business 
community and the banks of the country were put, be- 
cause of the fact that there had not been provided for this 
Bureau a few feet additional of needed storage room, can 
be inferred from the fact that of total orders for currency 
during the panic, amounting to $42,000,000, orders for 
over $11,000,000 were countermanded, the crisis of the 
money panic having passed before the twenty-five days 
necessary for the preparation of the currency had expired. 
With additional storage room, the Bureau will be enabled 
to keep on hand a sufficient stock of incomplete currency, 
so that orders from the banks can be filled upon receipt 
without delay. 

LIMITATION OF LOANS 

In his last Report the Comptroller called attention to the 
desirability of a modification of the law limiting certain 
loans to ten per cent of the capital of the bank, and pointed 
out that the effect of this provision was to encourage the 
making of loans, large in proportion to their total assets, in 
smaller banks and smaller communities, while it prohibited 
such loans in the larger cities where they could be made in 
accordance with the urgent demands of trade and consist- 
ent with the soundest banking principles. He pointed out 
that the defective and unequal working of the present 
provision was due to the greater ratio borne by banking 
resources to banking capital in the larger communities as 
compared with the like ratio in smaller communities. 

The present section of the law regulating excessive loans 
should be so altered as to allow the banks of larger com- 
munities to have more nearly the privilege of loaning a 
given per cent of their total assets to one individual, which 
now belongs, under a strict compliance with the present 
provision, to the banks of the smaller communities. The 



262 ESSAYS AND SPEECHES 

law against excessive loans should then be made enforce- 
able by the enactment of an amendment providing a pen- 
alty for infractions. 

The Comptroller, as before, would recommend that sec- 
tion 5200 of the Revised Statutes be amended by adding 
after the words "shall at no time exceed one tenth part of 
the amount of the capital stock of such association actually 
paid in" the following words: — 

Provided, That the restriction of this section as to the amount 
of total liabilities to any association, of any person, or of any com- 
pany, corporation, or firm for money borrowed, shall not apply 
where a loan in excess of one tenth part of the capital stock shall 
be less than two per cent of the total assets of said bank at the 
time of making said loan. Said loan shall be at all times protected 
by collateral security equal to or greater in value than the excess 
in the amount of said loan over one tenth of the capital stock. 

A strict penalty should then be provided for infractions 
of the amended section. 

NATIONAL BANKS OF $25,000 CAPITAL 

In accordance with the recommendation of the President 
and the Secretary of the Treasury, and for the purpose of 
affording our smaller communities the business advantages 
incident to increased banking facilities, the Comptroller 
would urge the enactment of laws authorizing the organiza- 
tion of national banks with a capital of $25,000 in towns of 
two thousand or less population. 

NATIONAL BANK EXAMINATIONS 

The work of the corps of national bank examiners during 
the year is worthy of special commendation. It is of course 
improper, for obvious reasons, for the Comptroller to point 
out the specific cases where, through the instrumentality of 
the examiners and their notification to directors of danger- 



BANK-NOTE CURRENCY 263 

ous practices on the part of active bank officers, institutions 
have been protected from grave danger of insolvency. 

During the year a system of special examinations has 
been on trial with advantageous results in marked in- 
stances. There has been utilized throughout the country 
special expert examiners, and an effort is being made 
through them better to supervise the work of local examin- 
ers as well as to add to the information of the Comptroller 
as to the condition of the national banks. The exchange of 
lists of banks for examination among examiners has been 
more frequent than heretofore, although the more exact 
knowledge of local credits, possible to a local examiner, 
limits the extent to which this can be done consistent with 
the best results. 

In connection with the efforts of the Comptroller to de- 
termine the safety of loans, examiners have been requested 
to keep a convenient and uniform tabulation of approxi- 
mate lines of larger credits extended by the banks for his 
reference. 

The benefit to the service resulting from the fund for 
special examinations of national banks, an increase in 
which was granted by Congress, as recommended in the 
last report of the Comptroller, has been material. By 
means of this fund investigations were conducted which 
resulted in decisive action by the Comptroller in relation to 
the affected banks, which investigations and resultant in- 
formation would have been otherwise impracticable. While 
this fund is small, the benefits derived from it merit special 
mention. 

The Comptroller recommends an increase in the annual 
fund provided for examinations of bank-note plates, and 
for the compensation of examiners engaged in special 
examinations of $2000, making the fund $5000 instead of 
$3000, as at present. 



264 ESSAYS AND SPEECHES 

INTERNATIONAL AND INTERCOLONIAL BANKING 

In his last Report the Comptroller called attention to the 
need of laws authorizing and regulating banks for the trans- 
action of international and intercolonial banking, and 
recommended the establishment of a commission to inves- 
tigate banking and commercial conditions in the new pos- 
sessions of the United States with a view to obtaining more 
exact knowledge of the nature of the banking legislation 
essential to the best interests of these new possessions, and 
to our own country in its business relations with them. The 
past year has emphasized the need of such legislation, and 
the Comptroller again calls attention to the disadvantage 
at which our country is placed by the lack of proper bank- 
ing facilities, not only in South American commerce, but in 
our commerce with our new possessions. 

The need of banking facilities to care for the rapidly 
growing business between the United States and the ter- 
ritories over which she now exercises sovereignty is such 
that of necessity banking institutions have already been 
established over which there is little or no governmental 
supervision. The earlier that intelligent and careful con- 
sideration can be given by Congress to the question of 
banking legislation for the new possessions, both for the 
local regulation of their domestic systems and the regula- 
tion of their banking relations with the United States, the 
better it will be for the domestic prosperity and trade 
relations of both. 

For the purpose of reference, and through the courtesy 
of the Secretary of the Treasury and the Secretary of War, 
and others, the Comptroller publishes, in an appendix to 
this report, information relative to financial conditions in 
Cuba and Porto Rico, including extracts from the report of 
Special Commissioner Edward W. Harden, who has gath- 



BANK-NOTE CURRENCY 265 

ered information relative to financial and banking condi- 
tions in the Philippines, all of which indicates the necessity 
and desirability of early action by Congress upon this im- 
portant subject. 

The Comptroller would renew his recommendations of 
one year ago that laws be passed authorizing the incorpo- 
ration of banks organized for the purpose of carrying on 
international and intercolonial banking, as distinguished 
from domestic banking, and that as preliminary thereto a 
commission be established to investigate local conditions 
and report upon the nature of the legislation best adapted 
for the interests of this country and her new possessions. 
In this connection he would again call attention to the ex- 
isting situation by quoting briefly from his last Report : — 

Unless some such legislation is provided, the American exporter 
and importer, in his trade with America's own colonies, will be 
compelled to endure all the disadvantages under which, in all 
South American markets and in many other markets of the world, 
he now labors in his competition with foreigners enjoying superior 
banking facilities. 

When, by means of international banks and their branches, the 
proper banking facilities are afforded those engaged in foreign 
trade, they transact their business with these banks in much the 
same manner as the domestic shippers of the United States trans- 
act business with our present banks. 

The American in his South American trade, as compared with 
the foreigner in the same line of business, is subjected to the same 
relative disadvantages as are experienced by a domestic shipper 
without banking facilities, as compared with another who pos- 
sesses them. 

Domestic dealers in supplies, in good credit, may make con- 
tracts with domestic wholesale purchasers in good credit for the 
sale and shipment of goods, for which the consignee gives his 
acceptance, payable at different intervals, sometimes months 
after the delivery to him of the shipment. 

The consignor discounts this accepted draft, given him for the 
goods, with his bank, thus receiving his capital at once for rein- 



266 ESSAYS AND SPEECHES 

vestment and enabling him to transact a larger business than if 
the capital invested in the goods was locked up until the maturity 
of the acceptance. On the other hand the consignee has the 
difference between the time of the arrival of the shipment and 
the maturity of the draft to sell the goods and to collect from 
the purchaser all or a portion of the amount necessary to pay the 
draft. 

The situation of the shipper without banking facilities is in 
sharp contrast. He must ordinarily sell for cash, instead of on 
credit, to the consignee, as he needs his capital in most cases for 
immediate reinvestment. As a result, in his competition with his 
more favored rivals he is not only compelled to accept lower 
prices, involving smaller margins of profit, but he must do a 
smaller business on the same capital invested. 

Thus, as compared with the English exporter, who, when his 
goods are shipped, can receive advances from an English inter- 
national bank upon the credit of his bills of lading and of the for- 
eign consignee, concerning whose credit the home bank, through 
its foreign branch, is well advised, the American shipper, in the 
majority of instances, is denied such privileges, and must await 
entire, instead of partial, reimbursement until the arrival of the 
goods at the foreign market and the collection of the draft for the 
purchase price made at the time of shipment. 

In addition to this disadvantage, the American exporter and 
importer in his trade with South American countries transacts all 
his business of consequence through English banks in terms of 
English money, paying the rates of exchange fixed by these 
foreign institutions. 



INSOLVENT NATIONAL BANKS 

At the date of the last Annual Report of this Bureau the 
number of national banks remaining in the hands of re- 
ceivers was 158. During the past year 12 banks have been 
placed in the hands of receivers, and 35 receiverships ter- 
minated, leaving at the present time 135 insolvent banks 
in the hands of receivers appointed by the Comptroller. 
The assets of these insolvent national banks at the date of 
the present report are of the nominal value of $39,849,770. 



BANK-NOTE CURRENCY 267 

Special attention has been given to the reduction of ex- 
penses of the several receiverships; and in the remaining 
receiverships, as compared with last year, a total reduction 
of about $50,000 in salaries, legal and other annual ex- 
penses, has been attained. There are at this time nineteen 
receiverships in the hands of one receiver at Washington. 
The assets of this latter class of banks are nominal in value 
and by the plan adopted a considerable additional annual 
saving has been made, which goes to increase the dividends 
to creditors. 

In addition to the number of receiverships which have 
been completely liquidated, 38 receiverships have been 
placed on the inactive list. In such cases the fixed salaries 
of the receivers are terminated, and they are allowed com- 
pensation only for services actually performed. There are 
at present 94 receivers who have in charge the assets of the 
135 insolvent banks, a number of such receivers adminis- 
tering upon the affairs of two or more banks. 

The 12 national banks which failed during the year 
makes a total of 587 failures from the organization of the 
Bureau to the date of this report, including 17 banks 
restored to solvency. 

The policy of consolidating two or more banks and plac- 
ing them in the hands of one receiver in the same city or 
locality has been found to be satisfactory, inasmuch as it 
results in the saving of salaries of receivers and in a lessen- 
ing of legal and other expenses. The administration of all 
insolvent banks is well advanced, and within a few months 
a number of receiverships will be closed. 

In the appendix will be found a table showing the nomi- 
nal value of the assets of the banks that have been or are 
being liquidated by receivers, with the collections, dis- 
bursements, claims proved, and dividends paid. For the 
purpose, however, of indicating the general cost of admin- 



268 ESSAYS AND SPEECHES 

istration of the affairs of insolvent banks in the hands of 
the Government there is presented herewith a summary of 
the tables given in detail in the appendix. 

Nominal assets at date of suspension 

Estimated good $79,376,277 

Estimated doubtful 71,154,423 

Estimated worthless < 53,538,125 

Additional assets secured since suspension 31,567,953 

Total assets $235,636,778 

Disposition of assets 

OFFSETS ALLOWED and settled $17,436,261 

Losses on assets compounded or sold under order of court . 70,721,452 

Nominal value of assets returned to stockholders 5,966,121 

Nominal value of remaining assets 39,894,770 

Collected from assets 101,618,174 

Total $235,636,778 

Collected from assets as above $101,618,174 

Collected from assessments upon shareholders 16,166,815 

Total collections from all sources $117,784,989 

Disposition of collections 

Loans paid and other disbursements $21,106,742 

Dividends paid 83,087,236 

Legal expenses paid 3,571,685 

Receivers' salaries and all other expenses 6,095,799 

Cash on hand 2,604,290 

Cash returned to stockholders 1,319,237 

Total $117,784,989 

Total amount assessed against shareholders $37,032,070 

Total amount of claims proved 127,002,895 

Percentage of collections from assets, including offsets al- 
lowed 60.82 

Percentage of collections from assessments upon stock- 
holders 43.65 

Percentage of legal expenses to collections from all sources, 

including offsets 2.64 

Percentage of other expenses to collections from all sources, 

including offsets 4.51 

Percentage of total expenses to collections from all sources, 

including offsets 7.15 



BANK-NOTE CURRENCY 269 

RULING AS TO SECOND ASSESSMENT UPON STOCKHOLDERS 

AND REBATE TO STOCKHOLDERS IN CASE OF 

INCORRECT ASSESSMENTS 

Since the inauguration by the Comptroller of the rule of 
making a second assessment upon stockholders of an in- 
solvent national bank when the first assessment, through 
miscalculation of the value of the assets, was less than the 
legal liability of the stockholders, and of rebating to the 
stockholders any excess beyond their legal liability which 
had been mistakenly collected through like error, as was 
delineated in the Report of 1898, the stockholders of ten in- 
solvent banks have been subjected to a second assessment 
aggregating in amount the sum of $386,000. In the same 
period of time there has been rebated to stockholders of six 
insolvent banks a sum aggregating $46,831.37 in cases 
where the amount realized from the first assessment was 
greater than the individual liability of each stockholder. 

The power of the Comptroller, under his ruling, to make 
the second assessment has been tested in four courts of 
competent jurisdiction. In two different Circuit Courts of 
the United States and in the Circuit Court of Appeals of 
the Ninth Circuit the action of the Comptroller has been 
sustained, and in one Circuit Court of the United States 
the power of the Comptroller to make subsequent assess- 
ments was denied. The last-mentioned case will be ap- 
pealed to the Circuit Court of Appeals. 



AMENDMENTS TO THE BANKING LAWS 
RECOMMENDED 

{From Report as Comptroller of the Currency, December 3, 1900) 

In complying with a provision of law, the Comptroller 
desires first to call attention to section 1 of the Act of July 
12, 1882. 

EXPIRATION OF CHARTERS OF NATIONAL BANKS AND 
EXTENSION OF CORPORATE EXISTENCE 

Under the provisions of section 1 of the Act of July 12, 
1882, the charters of 1737 national banks have been ex- 
tended for a term of twenty years from the date of expira- 
tion of the period of succession named in their original ar- 
ticles of association. The first of these extended charters 
will expire on July 14, 1902, and others will follow. The 
question is thus raised as to whether authority is conferred 
upon the Comptroller by the above-mentioned section to 
extend the corporate existence of a bank for a second term 
of twenty years from the date of expiration of the period of 
its first extension or whether under present law an associa- 
tion is limited to one extension of twenty years from the 
expiration of the period of succession named in the original 
articles of association. 

Section 1 of the Act of July 12, 1882, under which such 
extensions are granted, reads as follows : — 

That any national banking association organized under the 
acts of February twenty-fifth, eighteen hundred and sixty-three, 
June third, eighteen hundred and sixty -four, and February four- 
teenth, eighteen hundred and eighty, or under sections fifty-one 
hundred and thirty-three, fifty-one hundred and thirty-four, 
fifty-one hundred and thirty-five, fifty-one hundred and thirty- 



AMENDMENTS TO THE BANKING LAWS 271 

six, and fifty-one hundred and fifty -four of the Revised Statutes 
of the United States may, at any time within the two years next 
previous to the date of the expiration of its corporate existence 
under present law and with the approval of the Comptroller of the 
Currency, to be granted as hereinafter provided, extend its period 
of succession by amending its articles of association for a term of 
not more than twenty years from the expiration of the period of 
succession named in said articles of association, and shall have 
succession for such extended period unless sooner dissolved by the 
act of the shareholders owning two thirds of its stock, or unless its 
franchise becomes forfeited by some violation of law, or unless 
hereafter modified or repealed. 

While it will be observed that this act does not in express 
terms limit extensions to one period of twenty years, the 
implication to that effect is sufficiently clear to raise a 
doubt as to the Comptroller's authority to grant the second 
extension. 

In this view of the case, without additional legislation 
authorizing a further extension, a bank desiring to continue 
in business under the national system whose corporate 
existence has been once extended will be compelled to go 
into liquidation at the expiration of the period of its exten- 
sion and reorganize as a new association. 

This will, of course, render necessary the complete wind- 
ing-up of the affairs of the expiring bank, the retirement of 
its circulation, the withdrawal of its bonds, and the issuing 
of a new certificate of authority by the Comptroller, with a 
distinctively new title and charter number, as is at present 
the case with an entirely new organization. While the reor- 
ganized association might continue to be in all respects the 
same bank, with practically the same stockholders, direc- 
tors, and officers, the legislation hereinafter recommended 
would render unnecessary these steps, which would be 
attended with inconvenience both to the business public 
and the banks. 



272 ESSAYS AND SPEECHES 

I therefore respectfully recommend an amendment of 
section 1 of the Act of July 12, 1882, authorizing the Comp- 
troller of the Currency to extend for a further period of 
twenty years, under the conditions and limitations im- 
posed by said act, the charter of such expiring association 
as may desire to continue in the national banking system. 

Such legislation, to be effective, should be enacted into 
law at the earliest possible date to give associations desiring 
to avail themselves of its provisions ample time for the 
preliminary action necessary to an extension before their 
charters lapse. 

As before stated, the corporate existence of 1737 banks, 
with capital aggregating $417,628,115, has been extended 
since the passage of the Act of July 12, 1882. During the 
year ended October 31, 1900, there were forty-five exten- 
sions, the capital involved being $6,942,000. A list of the 
seventy-four associations whose corporate existence will 
terminate, during the coming year will be found in the 
appendix. The first bank to reach the end of its second 
term of corporate existence is the First National Bank of 
Findlay, Ohio, the date of the termination being July 14, 
1902. Between that date and the end of that year thirty-six 
associations which have had their charters extended will 
expire by limitation. 

RESTRICTIONS UPON LOANS TO DIRECTORS AND 
EXECUTIVE OFFICERS OF BANKS 

During the past year the Comptroller has made an in- 
vestigation into the matter of loans of national banks to 
directors and officers, with a view to gathering information 
bearing on a proposed amendment to the National Banking 
Act placing additional restrictions upon such loans. The 
records of this office indicate that large loans to directors 
and executive officers of banks have been the cause of a 



AMENDMENTS TO THE BANKING LAWS 273 

large percentage of the failures of national banks in the 
country, and that the restrictions of the present law are not 
sufficient to enable the Comptroller properly to check in 
some cases an undue tendency of those in executive au- 
thority to misuse their powers for personal purposes. 

It is the belief of the Comptroller that additional restric- 
tions should be placed upon the power of directors and 
executive officers of a national bank to borrow the funds 
intrusted by the depositors and stockholders of a bank to 
their management; and an investigation into the extent to 
which such loans are made emphasizes the desirability of 
such legislation. 

In regard to the proportion of failures attributable to 
excessive loans to officers, it appears that of the 370 na- 
tional bank failures since the organization of the system, 
5 were attributable exclusively to excessive loans to officers 
and directors ; 22 to excessive loans to officers and directors 
and depreciation of securities; 8 to excessive loans to officers 
and directors and investments in real estate; 15 to exces- 
sive loans to officers and directors, fraudulent management, 
and depreciation of securities; and 12 to excessive loans to 
officers, directors, and others, and fraudulent management. 
In other words, 62 failures, or practically 17 per cent of the 
total failures, were due to excessive accommodations to 
officers and directors and the other causes mentioned. 

The large percentage of these failures attributed to im- 
proper loans to directors and officers and the consideration 
of a proper provision of law to protect the business com- 
munity hereafter led to the investigation of all directors' 
loans now outstanding in the national banks of the country, 
the results of which are given herewith. 

This investigation shows that on June 29, 1900, the date 
of the Comptroller's call for a statement of condition from 
the national banks of the country, there were 28,709 direc- 



274 ESSAYS AND SPEECHES 

tors of national banks, of which 18,534 were directly or in- 
directly indebted to national banks under their manage- 
ment. The aggregate sum owed by these 18,534 borrowing 
directors and 2279 officers and employees who were not 
directors was $202,287,441. 

The total loans and discounts of the national banks of 
the country at this time were $2,623,512,200. The liability 
of directors and employees was, therefore, 7.71 per cent of 
this amount. 

The capital stock of the national banks of the United 
States on this date was $621,536,461. The direct and indi- 
rect liability of directors, officers, and employees of national 
banks, therefore, amounted to 32.55 per cent of this sum. 

The stock owned in national banks by the 18,534 borrow- 
ing directors amounted to $114,759,300. The direct loans 
of officers and directors amounted to $115,094,157 and 
their indirect liabilities to $87,193,284. 

In the New England States, Maine, New Hampshire, 
Vermont, Massachusetts, Rhode Island, and Connecticut, 
in 563 national banks, of $137,460,520 capital, the total 
number of directors on June 29, 1900, was 4258, of which 
2668 were indebted directly or indirectly in a sum aggre- 
gating $31,897,830. 

In the Eastern States, New York, New Jersey, Pennsyl- 
vania, Delaware, Maryland, and the District of Columbia, 
in 1001 national banks of $204,982,745 capital, the total 
number of directors on June 29, 1900, was 9127, of which 
6270 were indebted directly or indirectly in a sum aggre- 
gating $82,289,446. 

In the Southern States, Virginia, West Virginia, North 
Carolina, South Carolina, Georgia, Florida, Alabama, Mis- 
sissippi, Louisiana, Texas, Arkansas, Kentucky, and Ten- 
nessee, in 568 national banks of $67,149,467 capital, the 
total number of directors on June 29, 1900, was 4256, of 



AMENDMENTS TO THE BANKING LAWS 275 

which 2909 were indebted directly or indirectly in a sum 
aggregating $23,436,304. 

In the Middle States, Ohio, Indiana, Illinois, Michigan, 
Wisconsin, Minnesota, Iowa, and Missouri, in 1094 national 
banks of $161,698,927 capital, the total number of directors 
on June 29, 1900, was 7698, of which 4928 were indebted 
directly or indirectly in a sum aggregating $51,406,835. 

In the Western States, North Dakota, South Dakota, 
Nebraska, Kansas, Montana, Wyoming, Colorado, New 
Mexico, Oklahoma, and Indian Territory, in 384 national 
banks of $30,931,552 capital, the total number of directors 
on June 29, 1900, was 2592, of which 1333 were indebted, 
directly or indirectly, in a sum aggregating $6,690,881. 

In the Pacific States, Washington, Oregon, California, 
Idaho, Utah, Nevada, Arizona, and Alaska, in 122 national 
banks of $19,313,250 capital, the total number of directors 
on June 29, 1900, was 778, of which 426 were indebted, 
directly or indirectly, in a sum aggregating $4,008,402. 

While these tables do not necessarily indicate that na- 
tional banking officers and directors as a whole abuse their 
privileges, and many of these directors' loans are among 
the safest owned by the creditor banks, the Comptroller 
believes the tables show clearly the great importance of a 
properly framed law placing additional restrictions and 
safeguards around these loans, in which, the history of the 
banking system teaches, is involved the greatest danger of 
the improper and lax use of banking funds. 

The necessity for some amendment to the National 
Banking Act restricting loans by banks to their officers and 
employees has long been recognized by this office, as is 
evidenced by the recommendations on the subject of my 
predecessors in their Annual Reports to Congress. While 
the need for such legislation has been generally admitted, 
it has been found difficult to determine precisely what 



276 ESSAYS AND SPEECHES 

restrictions should be imposed, owing to the varying cir- 
cumstances under which such loans are granted. 

Comptroller Lacey in his Report for 1891 recommended 
that : — 

The active officers of a bank be excluded from incurring liabili- 
ties to the association with which they are connected, and that the 
direct and indirect liabilities of a director be confined to 20 per 
cent of the paid-up capital. 

Comptroller Hepburn in his Report for 1892 recom- 
mended : — 

That the law be so amended as to prohibit officers or employees 
of a bank from borrowing its funds in any manner, except upon 
application to and approval by the board of directors. 

Comptroller Eckels in his Report for 1893 recom- 
mended : — 

That no executive officer of a bank or employee thereof be per- 
mitted to borrow funds of such bank in any manner, except upon 
application to and approval by the board of directors. 

In formulating provisions of law restricting loans to exec- 
utive officers and directors it is important not to make them 
so unreasonable as to drive from such service the active, 
responsible, and honest business men of the country. The 
problem is to devise such restrictions for the safety of the 
depositors as will discourage improper loaning to directors, 
while not injuring the depositors by discouraging to too 
great an extent the assumption of the duties of bank direc- 
torship by the active and responsible members of the busi- 
ness community. 

Primarily, the law should have in view the safety of the 
depositors, and it should be recognized that their safety is 
as much endangered by the passage of a law which would 
drive good directors from the service as by the existence of 
a law which does not sufficiently restrict the opportunity 
of dishonest directors to abuse the powers of their position. 



AMENDMENTS TO THE BANKING LAWS 277 

It seems plain to the Comptroller that any law upon this 
subject should make a distinction in the nature of the re- 
strictions upon directors who are not officers which will 
not involve as much of a delay in the making of loans to 
them as in the making of loans to the executive officers 
of a bank, since the latter have the greater opportunity 
and latitude for improper methods in the use of trust 
funds. 

The Comptroller gives herewith a copy of the bill intro- 
duced at the last session of Congress by Hon. Marriott 
Brosius, chairman of the Committee on Banking and Cur- 
rency (H. R. 12,043, Fifty-Sixth Congress, first session), 
which has had his careful consideration, and the passage of 
which with some additions he earnestly recommends. This 
bill has been drawn so as to insure a greater degree of safety 
in loans to directors and officers with what is believed to be 
a minimum of inconvenience to such officers consistent with 
the safety of such transactions. It properly recognizes the 
distinction in the relations of directors to a bank and those 
sustained by executive officers. 

It will be noted that the provision made by this bill for 
the fixing of a line of credit for each director in advance 
reduces to a minimum the inconvenience of the greater 
supervision proposed. After such a line of credit has been 
fixed by the board of directors for an individual director, he 
will be no more hampered within that limit under the 
proposed law than he is at present. 

A BILL FOR THE BETTER CONTROL OF AND TO PROMOTE 
THE SAFETY OF NATIONAL BANKS 

Be it enacted by the Senate and House of Representatives of the 

United States of America in Congress assembled, — 

Section 1. That no national banking association shall make 

any loan to its president, its vice-president, its cashier, or any of 

its clerks, tellers, bookkeepers, agents, servants, or other persons 



278 ESSAYS AND SPEECHES 

in its employ until the proposition to make such a loan, stating the 
amount, terms, and security offered therefor, shall have been sub- 
mitted in writing by the person desiring the same to a meeting of 
the board of directors of such banking association, or of the execu- 
tive committee of such board, if any, and accepted and approved 
by a majority of those present constituting a quorum, and then 
not in excess of the amount allowed by law. At such meeting the 
person making such application shall not be present. The said 
acceptance and approval shall be made by a resolution, which 
resolution shall be voted upon by all present at such meeting an- 
swering to their names as called, and a record of such vote shall 
be kept and state separately the names of all persons voting in 
favor of such resolution, and of all persons voting against the 
same, and how each of the persons voted. In case such proposi- 
tion shall be submitted to the executive committee, the resolution 
and its vote thereon shall be read at the next meeting of the board 
of directors and entered at length in the minutes of such directors' 
meeting. 

Sec. 2. That every president, vice-president, director, cashier, 
teller, clerk, or agent of any such association who knowingly vio- 
lates section one of this act, or who aids or abets any officer, clerk, 
or agent in any such violation, shall be deemed guilty of a mis- 
demeanor, and shall be punished by a fine of not more than five 
thousand dollars, or by imprisonment not more than five years, or 
by both. 

Sec. 3. That the board of directors of any national banking 
association may at any regular meeting fix by resolution the 
limit of credit which shall be determined by a yea and nay vote, 
and the names of those voting for and against shall be entered of 
record in the books of the association. Within the limit of this 
credit and in the discretion of the executive officers of the associa- 
tion loans may be made to directors without other action by the 
board. When, however, such limit of credit has not been previ- 
ously fixed by the action of the board, no loan to a director shall 
be made unless approved by the board or the executive committee 
of the bank in the method provided herein for loans to executive 
officers or in the following manner: An application for a loan, not 
in excess of the amount allowed by law, to a director may be sub- 
mitted in writing by the director desiring the same to not less 
than two additional directors, who shall signify in writing their 
approval of the acceptance by the bank of said application. A 



AMENDMENTS TO THE BANKING LAWS 279 

loan to a director may, in the discretion of the executive officer of 
the bank, be made in accordance with such written application, 
accompanied by the written approval of two additional directors 
as aforesaid. At the time such loan is made said application and 
approval shall be entered at length in a record book of the bank, 
and shall be read at the first meeting of the directors following the 
making of said loan. Any national banking association making a 
loan to any director in violation of the provisions of this section 
shall forfeit to the United States a sum equal to double the 
amount of interest charged by said bank upon such loan, the same 
to be collected by the Comptroller of the Currency and paid into 
the Treasury of the United States. 

Sec. 4. That each report of every national association made 
to the Comptroller of the Currency in accordance with the provi- 
sions of section fifty-two hundred and eleven of the Revised 
Statutes of the United States shall exhibit in a schedule to be 
added thereto, under such classifications and in such forms as the 
Comptroller of the Currency may direct, the amount of debts 
due or to become due to such association from its president, vice- 
president, each of its directors, and from its cashier and any of 
its clerks, tellers, bookkeepers, agents, servants, or other persons 
in its employ, as principals, indorsers, sureties, guarantors, or 
otherwise, in a separate item from the other assets of said bank, 
and shall also state separately the amount of all debts to such 
association which are past due and remain unpaid by the afore- 
said parties : Provided, That nothing contained in this act shall 
require, or be deemed to require, or permit the publication of 
such schedule of the debts due or to become due to such associa- 
tion from each of its directors or officers or employees in any 
statement published in a newspaper as now required by law. 
No such association shall permit its president, its vice-president, 
its cashier, or any of its clerks, tellers, bookkeepers, agents, serv- 
ants, or other persons in its employ to become liable to it by 
reason of overdrawn account. 

Sec. 5. That section fifty -two hundred of the Revised Statutes 
of the United States be amended so as to read as f ollows : — 

"Sec. 5200. The total liabilities to any association of any per- 
son or of any company, corporation, or firm for money borrowed, 
including in the liabilities of a company or firm the liabilities of 
the several members thereof, shall at no time exceed one-tenth 
part of the amount of the capital stock of such association actu- 



280 



ESSAYS AND SPEECHES 



ally paid in. 1 But the discount of bills of exchange drawn in good faith 
against actually existing values, and the discount of commercial or 
business payer actually owned by the person negotiating the same 
shall not be considered as money borrowed: Provided, that the re- 
striction of this section as to the amount of total liabilities to any 
association of any person, or of any company, corporation, or firm 
for money borrowed shall not apply where a loan in excess of one- 
tenth part of the capital stock shall be less than two per centum 
of the total assets of said bank at the time of making said loan. 
Said loan shall be at all times protected by collateral security 
equal to or greater in value than the excess in the amount of said 
loan over one tenth of the capital stock." 2 



liability as payers, indorsers, etc., of national bank 
directors, of officers and employers other than 
directors; aggregate loans and discounts and capi- 
tal stock; percentage of liability as payers and 
indorsers, of directors, officers, and employees; 
total number of directors; number of borrowing 
directors, officers, etc. ; number of shares owned 
by borrowing directors and by other officers and 
employees; total number of banks' shares, at par 
of $100, on june 29, 1900 





No. of 
banks 


Liability as payers 


Liability as indorsers 


Geographical divisions 


Directors 


Officers and 
employees 
other than 
directors 


Directors 


Officers 
and em- 
ployees 
other than 
directors 


Total New England States . 

Total Eastern States 

Total Southern States 

Total Middle States 

Total Western States . . 
Total Pacific States 


563 
1,001 

568 
1,094 

384 

122 


$18,375,992 

46,995,599 

12,810,718 

27,641,516 

4,522,154 

2,938,108 


$242,172 

610,825 

234,611 

593,975 

69,901 

58,586 


$13,521,838 

35,293,847 

10,625,586 

23,765,319 

2,168,727 

1,070,294 


$117,016 

284,849 

174,789 

132,259 

21,726 

17,034 


Total United States . 


3,732 


$113,284,087 


$1,810,070 


$86,445,611 


$747,673 



1 The provision of the bill printed in italics and which is a part of sec- 
tion 5200, United States Revised Statutes, as it stands at present is 
omitted in H. R. 12,043, but in the judgment of the Comptroller should 
be allowed to remain in its present form. 

2 A penalty should be provided for infractions of this section, either 
personal in its nature or of double the amount of interest charged on such 
loan, with a method prescribed for collection of such penalty. 



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282 ESSAYS AND SPEECHES 

GENEKAL LIMITATION OF LOANS 

With the provisions of the National Banking Law as they 
are at present the proposal to add restrictions upon a 
certain class of loans unavoidably involves the discussion of 
the desirability of a change in the present provisions re- 
stricting other loans of national banks. It is essential that 
the Comptroller be given some practicable remedy to en- 
force restrictive provisions and that the present provi- 
sion should be so altered as to make its enforcement a 
matter of greater public advantage. The concurrent dis- 
cussion of the present provision limiting loans to a single 
individual to ten per cent of the capital stock of a bank and 
the proposed provision to limit and safeguard loans to 
directors and officers will serve to show them in their true 
relations and to indicate the great importance of a reforma- 
tion of the National Banking Law in this connection. 

The provision of the present law limiting the amount 
which can be loaned to any one individual or corporation in 
order to insure a general distribution of loans, and to pre- 
vent an improper concentration of a bank's funds in the 
hands of a few borrowers, is as follows : — 

Sec. 5200. The total liabilities of any association, of any per- 
son, or of any company, corporation, or firm, for money borrowed, 
including in the liabilities of a company or firm the liabilities of 
the several members thereof, shall at no time exceed one-tenth 
part of the amount of the capital stock of such association actu- 
ally paid in. But the discount of bills of exchange drawn in good 
faith against actually existing values, and the discount of com- 
mercial or business paper actually owned by the person negotiat- 
ing the same shall not be considered as money borrowed. 

In my Report for 1898 I discussed in detail the amend- 
ment to this section which seems essential, and I reincor- 
porate here the text of that discussion, having altered the 
accompanying tables and statistics to conform with the 



AMENDMENTS TO THE BANKING LAWS 283 

latest reports received from the national banks of the 
country : — 

Almost as if in admission of the fact that this provision is un- 
scientific and ill adapted to carry into practical effect the great 
principles of protection to depositors and shareholders, subserved 
by generally distributed and safe loans, the present law provides 
no specific penalty against individuals which the Comptroller can 
apply for violations of this section in the making of excessive 
loans where such violations do not affect the solvency of the bank 
nor justify the appointment of a receiver. 

A United States Court, under the general provision of the 
law providing for the forfeiture of the franchises of a bank 
for any violations of the Banking Act, might adjudicate the 
question of fact as to such violation, but could apply no 
other remedy than forfeiture of franchise. 

Since the institution of the national banking system the 
violation of this provision has been common, and the Comp- 
troller, though allowing no known violation to escape his 
written protest, finds great practical difficulty in his en- 
deavors to enforce this requirement. 

On June 29, 1900, the date of a call by the Comptroller 
for statement of condition of national banks, 1575 banks of 
the 3732 banks that were active on that date, constituting 
nearly two fifths of the entire number of banks in the sys- 
tem, reported loans in excess of the limit allowed by section 
5200 of the Revised Statutes of the United States. 

The principles underlying the present provision of the 
law are as valuable to depositors and shareholders in their 
application to the banks of larger communities as to the 
banks of smaller communities, but the observance of this 
provision, while not interfering with the current require- 
ments of either of the banks or the public in smaller com- 
munities, proves an almost insurmountable obstruction to 
the business of our larger cities. 



284 ESSAYS AND SPEECHES 

The present need is for an amendment to this provision 
which, while compelling, under penalty, the safe and proper 
distribution of loans of larger banks, will enable them to 
loan more nearly the same percentage of their total assets 
which the present provision allows to small banks. In this 
way the officers of larger banks can supply the proper 
needs of the larger communities without disregarding the 
law, and the Comptroller can hold them under personal 
penalty to strict observance of the amended law, which 
when disregarded would indicate improper distribution of 
loans, something which infractions of the present provi- 
sions in the case of many banks do not necessarily indi- 
cate. 

The greater ratio borne by banking resources to banking 
capital in the larger communities, as compared with a like 
ratio in smaller communities, is responsible for the defec- 
tive and unequal working of the present provision. 

The average ratio of resources to the average capital of 
the 44 national banks in the city of New York is as 17.5 is 
to 1; of the 16 national banks in Chicago as 14 is to 1; of 
the 6 national banks in St. Louis as 8.2 is to 1; of the 266 
national banks in other reserve cities as 9 is to 1 ; while in 
the 3400 country banks the ratio is but as 6.1 is to 1. 

The law limiting loans to 10 per cent of the capital, ap- 
plied to the 3400 banks of the smaller communities of the 
country, as a whole, would allow the loaning of 1.56 per 
cent of their total assets to one individual. As compared 
with this, the banks of the city of New York, on the aver- 
age, could not loan over fifty-seven one hundredths of one 
per cent of their total assets to any one individual; the 
banks of Chicago not over seventy one hundredths per 
cent of their total assets; the banks of St. Louis not over 
1.21 per cent of their total assets. 

In other words, the proportion of their assets which the 



AMENDMENTS TO THE BANKING LAWS 285 

country banks of the United States can loan, in strict com- 
pliance with section 5200, to one individual, is forty-six one 
hundredths of one per cent greater than in 266 reserve 
cities, thirty-five one hundredths of one per cent greater 
than in St. Louis, over twice as great as in Chicago, and 
nearly three times as great as in the city of New York. 

This provision, as it stands at present, constitutes an 
incentive to the making of loans the larger in proportion to 
the total assets of banks in smaller communities, where, as 
a rule, large loans which are safe are the most difficult to 
secure, while in the larger business centers of the country, 
where commercial conditions create a certain demand both 
from banks and borrowers for large and safe loans, its effect 
is the reverse to such an extent as to be injurious. 

A bank with small loans is not necessarily a bank with 
more distributed and safe loans. A bank with $100,000 
capital and $100,000 deposits, the latter being loaned in the 
maximum amounts allowed by the present provision (to 
wit: to ten individuals at $10,000 each), has not as well- 
distributed loans as a bank of $1,000,000 capital and 
$5,000,000 deposits, the latter being loaned to fifty people 
at the maximum of $100,000 each. In the former case the 
loans are distributed among only ten people and in the 
latter case among fifty people, and yet in each case there is 
strict compliance with the ten per cent restriction. 

One of the objects evidently designed to be subserved 
by the present provision of the law was the protection of 
the capital of a bank, as distinguished from the other 
assets of the bank. 

The framers of the section undoubtedly considered the 
capital of a bank as a greater safeguard for the depositors 
against loss when not over one-tenth part of it was loaned 
to a single individual or corporation without security. 
They recognized the fact, however, that when outside se- 



286 ESSAYS AND SPEECHES 

curity was had for loans the capital did not need for its 
protection the ten per cent restriction, and they provided 
accordingly for the exemption from the restriction of a 
certain class of secured loans, as follows : — 

But the discount of bills of exchange drawn in good faith 
against actually existing values, and the discount of commercial 
or business paper actually owned by the person negotiating the 
same, shall not be considered as money borrowed. 

In the modification of section 5200, which we shall rec- 
ommend, we invoke the same principle of outside security 
for the protection of the capital against loss upon loans 
exceeding the ten per cent limit. The size of the loan is of 
itself no indication of its strength or weakness. If the size 
of a loan is not such as to be an undue concentration of the 
assets of a banking institution in the hands of one individ- 
ual or corporation, thus depriving its creditors and share- 
holders of the safety of the law of the average, it is not wise, 
either upon economic grounds or upon grounds of public 
policy, to forbid it by law. If, however, the size of a loan is 
such as to cause such undue concentration, its prevention 
is justifiable on both grounds. 

Recognizing these truths, it is easier to understand why 
in many instances, a strict compliance with this provision 
of the law (section 5200, United States Revised Statutes), 
is consistent with all the needs of the current business of a 
small community and a proper protection to both banks 
and the public, yet in some larger communities, it seriously 
interferes with the business requirements of both the banks 
and the public, and adds in no way to the safety of the 
depositor. 

The limit of the amount of single loans to an arbitrary 
percentage of either the capital or the sum of the capital 
and the surplus of a bank does not insure a general or 



AMENDMENTS TO THE BANKING LAWS 287 

proper distribution of loans in all cases. Since, as stated 
before, the size of a loan is not, per se, related to its safety, 
the more important proportion to consider when endeavor- 
ing to regulate the distribution of loans by law is that of the 
amount of the loan to the total assets, rather than that 
of the loan to the amount of the capital. Grounds of 
public policy suggest as advisable the largest liberty in 
loans not inconsistent with the absolute safety of the de- 
positor. 

The habitual disregard of the present provision by the 
officers of so many banks interferes with the proper super- 
vision of the banks by the Comptroller and tends to create 
indifference to the other restrictions of the National Bank- 
ing Law. 

The failure of the present law to provide the power to 
apply a penalty for the making of excessive loans sometimes 
embarrasses the Comptroller in endeavoring to check tend- 
encies toward recklessness in loaning, which point to the 
ultimate ruin of a banking institution. 

As before stated, the present provision, when properly 
altered, should allow the banks of larger communities to 
have more nearly the privilege of loaning a given percent- 
age of their total assets to one individual, which now be- 
longs, under a strict compliance with the present provision, 
to the banks of the smaller communities. From this priv- 
ilege they are now debarred by law. 

The desired results can be obtained, in our judgment, 
by adding, after the words, in section 5200, "shall at no 
time exceed one-tenth part of the amount of capital 
stock of such association actually paid in," the following 
words : — 

Provided, That the restriction of this section as to the amount 
of total liabilities to any association of any person, or of any 
company, corporation, or firm, for money borrowed shall not 



288 ESSAYS AND SPEECHES 

apply where a loan in excess of one-tenth part of the capital 
stock shall be less than two per cent of the total assets of said 
bank at the time of making said loan. Said loan shall be at all 
times protected by collateral security equal to or greater in value 
than the excess in the amount of said loan over one tenth of the 
capital stock. 

A strict penalty enforceable by the Comptroller should 
then be provided for infractions of the amended section by 
the officers of banks to enable the Comptroller to success- 
fully enforce general and strict compliance with its terms. 

The suggested amendment will make section 5200 just 
and equitable in its relation to all national banks and to all 
communities of our country, large and small, which it is 
not at present. 

It would not lessen the amount which the smaller banks 
can now loan in compliance with the section as it stands at 
present. At the same time it would not allow the larger 
banks to loan to any one individual or corporation more 
than ten per cent of the capital, unless such loan, in addi- 
tion to being secured for the excess, would not amount to a 
greater per cent of the total assets than is consistent with 
the safe distribution of loans and the resultant protection 
to depositors. 

Section 5200, thus amended, will not interfere, as at 
present, with the right of the banks in the larger communi- 
ties to meet the legitimate requirements of business in these 
commercial centers. It will enable the Comptroller, by its 
enforcement, to prevent any undue concentration of loans 
and conserve their general distribution. 

Under the section thus amended the capital of a bank 
will be protected, inasmuch as no loan in excess of the ten 
per cent limit can then be made, except upon proper col- 
lateral security. 

The penalty clause will enable the Comptroller not only 



AMENDMENTS TO THE BANKING LAWS 2$& 

to limit the size, but to enforce the securing of excessive 
loans. 

The following table shows the inequality of the present 
law in its practical effects upon the banks of larger and 
smaller communities, so far as the possible distribution of 
loans is concerned : — 



Banks in — 


Num- 
ber of 
banks 
June 
29, 
1900 


Average 
resources 


Average 
capital 


Maximum 

average 

loan, 10 

per cent of 

capital 


Ratio of 
average 
resources 
to average 
capital 


Average 
maximum j 
loan to aver- 
age resources, 
now allowed 
by section 
5200 


New York City.. 

Chicago 

St. Louis 

All central re- 
serve cities .... 
Other reserve 


44 

16 

6 

66 

266 
3,400 
3,732 


$24,188,833 
16,458,878 
15,651,533 

21,503,817 

5,068,585 

640,197 

1,324,803 


$1,381,818 
1,153,125 
1,900,000 

1,373,485 

561,821 
103,192 
166,542 


$138,181 
115,312 
190,000 

137,348 

56,182 
10,309 
16,654 


17.5 to 1 

14.2 to 1 
8.2 to 1 

15.6 to 1 

9.0 to 1 

6.1 to 1 
8.0 to 1 


.57 of 1% 
.70 of 1% 

1.21% 

.64 of 1% 
1.10% 


Country banks... 
United States.... 


1.56% 
1.21% 



For the purpose of ascertaining the general result of the 
suggested amendment to section 5200, United States Re- 
vised Statutes, an examination has been made of the re- 
ports of condition of the national banks, of date June 29, 
1900. In the following table is set forth the number of 
banks in reserve cities named on June 29, 1900, number of 
loans in excess of the legal limit, loans which would be exces- 
sive if allowed to the limit of two per cent of the total re- 
sources, and number of banks in which loans equaling ten 
per cent of their capital would be greater than two per cent 
of total assets, the loaning power of which the proposed 
limit would not increase. The table shows similar informa- 
tion relative to one hundred banks selected at random from 
various sections of the country and also the total number of 
separate loans and discounts of such banks and of those 
located in the reserve cities on November 12, 1900: — 



290 



ESSAYS AND SPEECHES 



Cities 


Num- 
ber of 
banks 


Total number 
of loans out- 
standing 
November 12, 
1900 


Number of 

excessive 
loans under 
section5200 


Number of 
loans in 

excess of the 
proposed 

two per cent 
limit 


Number of 
banks in which 
loans equaling 

ten per cent 

of their capital 

would be 

greater than 
two per cent of 
total assets, the 
loaning power 

of which the 
proposed limit 

would not in- 
crease 


1. New York City.... 

2. Chicago 


44 

16 

6 


38,102 

23,272 

9,967 


707 
86 
19 


26 
11 

4 


14 
5 


3. St. Louis 


3 


Total 


66 

38 

6 

5 

36 

31 

19 

11 

2 

7 

8 

5 

13 
15 
6 
4 
6 
4 
4 
5 
6 
6 
2 
3 
8 
4 
4 
4 
4 


71,341 

33,269 

4,794 

3,576 

26,463 

18,345 

17,955 

9,808 

1,532 

5,019 

7,560 

1,671 

18,510 

13,019 

5,082 

4,987 

6,180 

5,743 

3,002 

2,800 

2,202 

6,999 

891 

2,020 

5,032 

4,875 

3,805 

2,687 

1,390 


812 

7 

77 

47 

156 

180 

30 

28 

4 

67 

8 

27 

19 

43 

3 

6 

6 

10 

4 

6 

15 

60 

16 

6 

11 

29 

10 

8 

9 


41 

2 
14 
6 
42 
70 
7 
5 
4 
7 
2 
3 
5 
10 

1 
3 
1 

1 
7 
4 
2 

7 
4 
6 
5 
7 


22 


1. Boston 


2 


2. Albany 


5 


3. Brooklyn 


3 


4. Philadelphia 

5. Pittsburg 


13 
19 


6. Baltimore 

7. Washington, D.C.. 

8. Savannah 

9. New Orleans 

10. Louisville 


6 
3 
1 

6 

2 


11. Houston 


2 


12. Cincinnati 

13. Cleveland 

14. Columbus 

15. Indianapolis 

16. Detroit 


4 
6 

1 
3 


17. Milwaukee 

18. Des Moines 

19. St. Paul 


1 

1 


20. Minneapolis 

21. Kansas City 

22. St. Joseph 

23. Lincoln 


3 

2 
1 



24. Omaha 


5 


25. Denver 


2 


26. San Francisco 

27. Los Angeles 

28. Portland, Ore 


3 
3 
3 


Total 


266 

332 
100 


219,216 

290,557 
55,052 


892 

1,704 
301 


225 

266 
266 


100 


Total of all reserve cities 
Country 


122 

92 


Total 


432 


345,609 


2,005 


492 


214 







AMENDMENTS TO THE BANKING LAWS 291 

RECOMMENDATIONS OF PROVISIONS REQUIRING THE 
STRENGTHENING OF GENERAL CASH RESERVE 

The question of those laws which affect the right of one 
national bank to consider as a cash resource a deposit in 
another national bank, called its reserve agent, is one of 
great importance and involves the most fundamental prin- 
ciples of safe banking. The extent to which the reserve of 
one bank can safely be represented by what is practically a 
loan to another bank, instead of by cash in its vaults, is a 
proper subject for consideration at this time, in view of the 
financial experiences through which this country has passed 
during the past few years. 

In times of financial crisis, such as 1893, when there are 
widespread withdrawals in currency, not only in reserve 
cities, but throughout the country, the reserve cities are 
subjected to a strain which endangers the stability of the 
entire banking system. 

The reserve banks, as a rule, recognizing the instability 
of bank balances, must loan a large proportion of their 
money on call. To secure sufficient call loans they must go 
to the speculative exchanges, and the injurious results of 
that practice are easily understood. 

It is only by loaning money on speculative securities 
that the banks are enabled to pay the high rates of interest 
on bank-deposit balances which form the attraction to the 
country banks for the deposit of so much larger a portion of 
their funds in New York than is needed for the clearance of 
exchange. During the summer of 1899 there occurred a 
marked demonstration of the evil effects of this practice 
upon the legitimate business of the country. At that time 
there was a marked slackening in the demand for money in 
the interior of the country, and the banks of that section 
found it difficult safely to loan their funds. As a result, the 



292 ESSAYS AND SPEECHES 

interest paid by Eastern reserve agents upon deposit bal- 
ances attracted an immense surplus to New York and 
other Eastern cities. 

This redundancy of money in New York and the East 
and the ease with which loans upon speculative collaterals 
were there obtained immediately created a speculative 
movement in stocks, which was carried on with a con- 
stantly rising range of prices until the fall of last year. At 
that time the crop movement in the West and the rising 
rate of interest there led the banks of the interior to draw 
upon their balances in New York and to order the shipment 
of large amounts of currency as against these balances. It 
is to be noted that at the time these demands took place the 
business of the country was in a prosperous condition, with 
a tendency toward an increase in general prices and in the 
wages of labor. There was no lack of confidence in the 
country and nothing which indicated panic condition, and 
yet this demand by the banks of the West for the shipment 
of currency on deposit with reserve agents resulted in a 
panic upon the Stock Exchange of New York, which in- 
stantly became a grave menace to the entire business of the 
country. 

In the abnormal demand for money created by this panic 
on the Stock Exchange the ordinary credits to the legiti- 
mate business and commercial enterprises of the country 
were necessarily curtailed by the banks, and unquestion- 
ably great damage would have been done to such inter- 
ests had not the Secretary of the Treasury, seeing the 
possibility of evil to the country at large, interfered to 
prevent a rapidly increasing stringency in the money 
market. 

It is to be remembered, of course, that the exchange 
business of the interior banks will always necessitate large 
deposit balances in New York and other reserve cities, and 



AMENDMENTS TO THE BANKING LAWS 293 

that at certain seasons of the year abnormally large bal- 
ances of idle funds may be attracted to different parts of 
the country, following higher interest rates. But it is sug- 
gested that public policy demands that banks of the coun- 
try should not be allowed to deposit with other banks so 
large a portion of that fund which in theory is regarded 
as sacredly devoted to the protection of the interests 
of the depositors. They should be compelled to hold a 
larger portion of this fund in cash in their vaults, so 
that it can always be devoted to its proper use, beyond 
peradventure. 

In the panics of 1873 and 1893 and on other occasions the 
New York banks for a considerable time refused to ship 
currency in response to demands from banks in the interior, 
showing in the extreme test of panic that the reserve which 
had been counted as cash by the banks of the country was 
not, in fact, at all times available to enable them to meet 
the demands of their depositors. While restrictions placed 
upon the power of banks to count as banking reserve so 
large a proportion of money on deposit in reserve cities will 
not have the effect of preventing speculative transactions 
in money centers, it will not have a tendency to encourage 
them to so great an extent as does the present law, at a risk 
at times to the best interests of legitimate business and at 
the cost of weakening the banking system as a whole, by 
creating too great a disproportion between the aggregate 
cash resources and the aggregate deposit liabilities. 

It is to be remembered that so far as the ability of the 
banks to serve the public is concerned it will not be im- 
paired by smaller balances in reserve cities. The banks of 
necessity must furnish exchange, and will accordingly keep 
the balance with correspondents necessary for such purpose. 
The permission given by the law to the reserve agent is 
primarily for the purpose of convenience and profit for the 



294 ESSAYS AND SPEECHES 

banks, and not for the convenience of the public in any of 
its relations to the bank. 

The Comptroller believes that under the present law re- 
garding reserve cities too great latitude is now given the 
banks in connection with the use of the reserve, the primary 
object of which is the protection of the depositors of the 
banks, and he recommends that amendments to the laws 
be passed requiring that a larger proportion of the reserve 
should be kept in cash in the vaults of the bank. Consider- 
ing the banking system as a whole, the present ability of 
banks to use credits with reserve banks as a basis of loans 
creates too great an extension of aggregate deposit cred- 
its as compared with aggregate cash resources, which, in 
times of liquidation and financial panic, increases the ne- 
cessity upon the banks of demanding payment of loans 
from the community and adds to the demoralization of 
business incident to such period. By increasing the re- 
strictions upon the right of banks to count deposits with 
reserve agents as cash, a firmer and safer foundation will 
be built under the deposit credits of the country, and it is 
the belief of the Comptroller that in times of liquidation 
the greater strength of the banks will more than compen- 
sate them for the loss of the small amount of interest on a 
portion of their balances which may be due to a change in 
the present law. 

It is therefore recommended that section 5192 of the Re- 
vised Statutes of the United States be amended so that un- 
der its provisions but one fifth instead of three fifths of the 
reserve of fifteen per cent required by law to be kept by 
banks not reserve agents may consist of balances due from 
reserve banks; and that section 5195 of the Revised Stat- 
utes of the United States, which authorizes banks in smaller 
reserve cities to keep one half of their lawful money reserve 
in cash with central reserve cities, be repealed. 



AMENDMENTS TO THE BANKING LAWS 295 

RECOMMENDATION AS TO FEES FOR NATIONAL BANK 
EXAMINATIONS 

The Comptroller repeats the recommendation made by 
his predecessors, that the present law should be so amended 
as to provide fixed salaries for bank examiners, to be paid 
from a fund collected from the banks, to take the place of 
the fee system now in force. The amount allowed an ex- 
aminer for the examination of smaller banks is not suffi- 
cient to compensate him for the time necessary, in many 
cases, for an extended examination. The present system 
encourages to too great an extent superficiality in exam- 
inations, and interferes greatly with the proper and wise 
apportionment of time of examiners among the different 
banks. 

INTERNATIONAL AND INTERCOLONIAL BANKS AND 

REPORTS AS TO BANKING SYSTEMS IN PORTO 

RICO, HAWAII, AND THE PHILIPPINES 

The rapid growth of business between the United States 
and its new island territory and the increasing commerce of 
the country with South America emphasizes the need of 
laws authorizing and regulating banks for the transaction 
of international and intercolonial banking, to which, in his 
last two Annual Reports, the Comptroller has already 
called attention. 

Under the necessities of trade such institutions are 
springing into existence, and they are at present under 
little or no supervision in the interest of the public. A law 
properly framed to regulate such banking cannot be en- 
acted too soon, both for the purpose of public protection 
and for assuring to institutions contemplating entering this 
business a stable legal basis. 

In connection with the detailed reasons for the passage of 



296 ESSAYS AND SPEECHES 

such legislation and a statement of its important relation 
to the business welfare of our nation, which were outlined 
in the former reports of the Comptroller, special attention 
is called to the information as to the banking systems of the 
Philippines, Porto Rico, and Hawaii, contained in the ap- 
pendix to this Report. Through the action of Congress the 
National Banking Act is now in force in Hawaii and Porto 
Rico, but no provision has been made for the intercolonial 
banking essential to trade interests, and for the supervision 
in the interest and protection of the public of such native 
banking institutions as were in existence upon our accession 
to sovereignty of these islands. 

Only one national banking institution has been incor- 
porated under present law for the purpose of transacting 
business in the islands, to wit : The First National Bank of 
Hawaii, at Honolulu, H.I., with a capital of $500,000. 

This whole subject is one of great and immediate concern 
and should have the prompt attention of Congress. 

For the purpose of securing such a statement of banking 
conditions in our island possessions as would indicate the 
nature and scope of the problem of a proper governmental 
supervision, the Comptroller addressed the following letter 
to Hon. Elihu Root, Secretary of War, and a similar letter 
to Hon. Charles H. Allen, Governor of Porto Rico, and 
Hon. Sanford B. Dole, Governor of Hawaii: — 

Treasury Department, 
Office of the Comptroller of the Currency, 
Washington, D.C., August 10, 1900. 
Sir: — 

The National Banking Act makes it the duty of the Comptrol- 
ler of the Currency to make a statement in his Annual Report to 
Congress as to the resources and liabilities of the banking systems 
of the United States other than national, and it seems desirable 
that I incorporate, if possible, in my next annual report infor- 
mation as to the existing banking institutions of the Philippine 



AMENDMENTS TO THE BANKING LAWS 297 

Islands, including such financial statements of their condition 
as it is possible to obtain from them. In my last Report to Con- 
gress I republished extracts from the report of Mr. Edward W. 
Harden, special commissioner of the United States, who was sent 
by the Treasury Department to make a report upon the financial 
and industrial condition of the Philippines. 

Had I any appropriation available for the purpose I should not 
hesitate to make an independent investigation, but as I have not, 
the purpose of this letter is to ascertain whether or not it is pos- 
sible for you, legally and consistently with the interests of your 
own Department, to detail some one of your present force in the 
Philippines who would be competent therefor, to obtain state- 
ments of the condition of all the different banking institutions in 
the islands, and as complete a statement as possible of the laws 
under which such institutions have been incorporated or now 
exercise their power. It would be especially desirable in this con- 
nection to have an exact statement relative to any of these banks. 

In view of the general interest manifested in financial condi- 
tions in the Philippines and the large and general circulation of 
the Reports of the Comptroller of the Currency among the busi- 
ness men of the country, it would seem appropriate that such in- 
formation gathered by your representatives be used therein. It is 
understood, of course, that any matter furnished will be printed 
as originating from your Department. If it is possible for you 
in any way to extend to this office such service and courtesy, I 
should be greatly obliged. 

Respectfully, 

Charles G. Dawes, Comptroller. 
Hon. Elihu Root, 

Secretary of War, Washington, D.C. 

Through the courtesy of these officials and in response to 
this request much information has been furnished, and is 
printed in the appendix. The subject is one of such vast 
importance, presenting so many complex and new prob- 
lems in finance and banking, both domestic and interco- 
lonial in nature, that, as preliminary to any step toward 
legislation by Congress, a commission should be established 
to investigate and study local conditions and to report upon 



298 ESSAYS AND SPEECHES 

the nature of the banking legislation best adapted for the 
interests of this country and her new possessions. 

The Comptroller earnestly renews his former recom- 
mendations to this effect. 



PROPOSED CHANGES IN OUR BANKING 
LAWS 

(Address delivered before the Pennsylvania Bankers' Association, at 
Pittsburg, September, 1903. Stenographically reported) 

The subject which I propose to discuss under this cap- 
tion is that of asset currency and branch banking, and it is 
one which has agitated the bankers of the United States for 
the last eight years. This question first began to be dis- 
cussed about the time of the Banking Association meeting 
at Baltimore, — the time when the Baltimore plans, so 
called, were first enunciated, — and you will remember 
that at that time these so-called plans for asset currency 
were offered as means primarily of governmental currency 
reform. The panic of 1893 had exposed the inherent weak- 
ness of our governmental financial system as it was at that 
time. That inherent weakness had existed years before 
that, but it took a period of deficient governmental reve- 
nues to develop that weakness and create public sentiment 
in the United States for its reform. A favorable general 
public sentiment is always necessary in this country of 
ours before enacting long-discussed legislation affecting 
our interests. 

The panic of 1893 had developed a deficiency in govern- 
mental revenue. The expenses of the Government were 
greater than the income of the Government. As a conse- 
quence, the gold reserve in the Treasury of the United 
States, upon the existence of which depends the inter- 
changeability of the greenbacks and other forms of gov- 
ernmental credit currency into gold upon demand, was en- 
croached upon for the purpose of paying the expenses of the 



300 ESSAYS AND SPEECHES 

Government, — governmental income not being sufficient, 
— and there came to be a disproportion between the gold 
in the Treasury and the demand currency liabilities of the 
Government. That disproportion commenced to under- 
mine the confidence of the people in the stability of our 
medium of exchange, and as a measure of governmental 
currency reform one of two things had to be done: either 
that disproportion had to be lessened by decreasing the 
amount of currency liabilities — in other words, by retiring 
the greenbacks : or it had to be lessened by increasing the 
amount of gold in the Treasury, allowing the currency lia- 
bilities to remain as they were. Now, those who were in 
favor of asset bank-notes were in favor of retiring $346,- 
000,000 of greenbacks of the Government which were in 
circulation, and, for the purpose of filling the vacuum in the 
general circulation to be thus caused by the retirement of 
the greenbacks, they urged the provision for these notes. 
The Government, however, did not take that means of 
currency reform. Under the law of March 14, 1900, the 
gold in the Treasury was "shored up" and properly pro- 
tected against periods of deficient governmental revenues. 
Confidence was restored in the stability of our govern- 
mental credit currency, which depends for its value just as 
much upon its exchangeability into gold at the Treasury 
upon demand, as a check against any deposit depends for 
its value upon its exchangeability into money, or into an- 
other form of credit equally as good as money, at your 
bank. Therefore, there does not at this time exist any ex- 
cuse, so far as a governmental necessity is concerned, for 
these asset notes, which at that time were advocated as 
chiefly important because with their aid we could cancel 
the greenbacks and shift the burden of gold redemption of 
a portion of the credit circulation of the country upon the 
shoulders of the banks. We have, however, since the pas- 



PROPOSED CHANGES IN BANKING LAWS 301 

sage of the law of 1900, heard this argument for asset notes, 
and some reasons for it exist now as then, and are most im- 
portant. But they are based upon the needs of the business 
community as distinguished from the governmental needs. 

It is proposed under these plans — I think we are all 
familiar with them — to relieve the banks of the United 
States from the necessity of depositing government bonds 
as a condition precedent to the issuing of bank-notes, and 
to allow them to issue these notes against their assets; the 
notes to be secured by a redemption fund of five per cent, 
as under our present system, and that redemption fund to 
be kept replenished by a limited tax upon the issues of such 
national banks as choose to issue the notes. Then, in the 
case of the failure of any particular bank which has issued 
these notes, there is to be a first lien upon the assets of the 
failing bank for the benefit of the note-holders of the bank, 
as distinguished from the deposit creditors of the bank. 
And it has been estimated that, if the national banks of the 
United States had, since the establishment of the system, 
issued the notes which are in circulation now, and had not 
had any government bonds upon deposit with the Treasury 
of the United States as security, the tax necessary to be 
levied to have redeemed all notes in full would have been a 
very small one. 

Now, in considering this argument, I want to call your 
attention to one or two things, lest we be misled by these 
figures. In the first place, this system of note issues, which 
it is proposed to authorize by law, is an optional system of 
bank-note issue. It is not necessary, under this proposed 
law, for a national bank to issue these asset notes unless it 
desires to issue them. That being the case, it is very diffi- 
cult for us to make an estimate of the amount of tax upon 
these issues which will be necessary to make the notes safe, 
based upon the experience of the national banking system; 



302 ESSAYS AND SPEECHES 

for we do not know how many of the five thousand na- 
tional banks in the country will choose to issue these notes. 
If only a few hundred of the weaker banks should choose to 
issue the notes, the tax should not and would not be esti- 
mated the same as if one thousand strong banks chose to 
issue the notes. If a thousand banks chose to issue the 
notes, the tax should not be the same as if four thousand 
banks issued the notes. But we do not know how many na- 
tional banks will avail themselves of this privilege of issu- 
ing uncovered currency, and yet that tax, levied for the 
purpose of making these notes safe, is a limited one — a tax 
which thus limits the liability of each one of the issuing 
banks for the notes of another bank. 

Again, we do not know what the national system will be 
if the banks of the United States are given the privilege of 
issuing uncovered currency. Mr. C. C. Hay, of the Ameri- 
can Banker, told me that the record collected by this maga- 
zine showed that at this time there were 17,635 banks in the 
United States, of which about 5000 were national banks, 
and over 12,000 banks were outside the national system. 
The bulk of those outside the national system are small 
banks, and the greater part of them eligible through con- 
version to come into the national system. Now, if they 
should come into the national banking system for the pur- 
pose of availing themselves of the privilege of issuing un- 
covered currency, how do we know what the national 
banking system will be? 

Why, with this chance of difference in the condition of 
the banking system to which the proposed law applies, 
should this tax be thus limited? Simply because the fram- 
ers of this bill know that, unless that tax is limited, the 
stronger banks will not issue the currency. The stronger 
banks of the United States are not going to undertake to 
guarantee and be responsible for the issues of the weaker 



PROPOSED CHANGES IN BANKING LAWS 303 

banks. But what moral right have we, by limiting the tax, 
to put a risk upon the community, whose bank-notes are 
now safe, which the banks themselves are not willing to 
take for the purpose of securing the profits incident to the 
issue of these notes? I am very well prepared to admit 
that, provided there is a first lien in favor of the note-hold- 
ing creditors as against the deposit-holding creditors of a 
bank, a limited tax is sufficient to make the notes safe; but 
my contention is that a first lien in the case of uncovered 
notes, as distinguished from the present bond-protected 
bank-notes of the country, is unfair and unjust to the 
deposit-holding creditors of the country; and, in addition 
to that, if, under this proposed system, this first lien is al- 
lowed, the business of the country will be greatly injured 
by the lack of confidence which such a system will tend to 
create in the minds of the deposit-holding classes as a whole. 
Right here — for I want to emphasize the importance of 
this argument against a first lien for note-holders — let me 
speak of what the chief function of a bank is. The chief 
function of a bank in any community of this country is not 
the note-issuing function. The note-issuing function in the 
most of the great Continental banks is the chief function of 
the bank, or of very much more importance, at least, than 
the note-issuing function of the banks in this country. The 
great function of the banks in this country is the produc- 
tion of purchasing power. A depositor leaves $1000 with 
the bank and receives credit for it. At the same time, under 
the rules of banking, the bank can loan $750 of this $1000 
in the shape of credit upon its books to another customer, 
thus increasing the purchasing power of the community 
by seventy-five per cent of the original deposit. And so, 
in this country, under the normal and ordinary operations 
of the banking system, there has been built up in the banks 
a magnificent deposit credit to the people of the United 



304 ESSAYS AND SPEECHES 

States. There is now on deposit in solvent banks of the 
United States over $9,000,000,000, the bulk of which is 
subject to check; and yet the entire outstanding circulation 
of gold and silver and paper of the United States Govern- 
ment is only about $2,250,000,000, or about twenty-five 
per cent of that sum. Now, it is through checks and drafts 
drawn against that magnificent deposit balance that 
ninety per cent of the business of the United States is done, 
and it is not at this time a matter of so much importance 
as to whether this comparatively unimportant function of 
issuing notes is changed. The important thing to consider 
is what we are going to do in connection with any change 
in the form of this comparatively unimportant function of 
issuing notes to endanger the confidence of the people in 
the safety of this magnificent deposit credit. For when 
you commence to endanger the confidence of the people in 
that deposit balance, when you frighten, in any degree, 
the deposit-holders, then is the time that we are face to 
face with all the trouble incident to panics — with all the 
trouble incident to contraction. That is the great question 
in the discussion of these plans for asset notes. Do not 
endanger this prosperity which we have built up at so much 
cost in this country to-day, by doing anything which tends 
to lessen the confidence of the public in the great credit 
balances upon deposit in the banks of the United States. 

Now, let us see how the first lien — coming back to that 
— may do it. It is undoubtedly true that, if all the losses 
which would have accrued in the past to holders of national 
bank-notes, if there had been no United States bonds as 
security for them, were apportioned over the entire amount 
of deposits in the country, the percentage of loss would 
have been a very small one. But losses upon these notes 
would not be apportioned over all deposits. This first lien 
localizes losses. It means that in any community, should a 



PROPOSED CHANGES IN BANKING LAWS 305 

bank fail, the loss of the deposit-holding creditors, through 
that issuance of asset notes, would not be a proportion that 
the loss in that particular bank would bear to the total 
losses under the entire system. It means that all the loss 
upon the notes of that particular bank must come out of 
that particular set of depositors. Now, there would be a 
very great difference in the effect of those localized losses 
upon the confidence of the people in the safety of deposit 
balances, and the effect if that loss could be fairly appor- 
tioned and distributed. And under any of those plans, if we 
take as far as we safely can the experience of the national 
banking system as a guide, it will, I think, be seen that by 
giving a first lien for the benefit of asset note-holders as 
distinguished from deposit-holders, the percentage of their 
claims which deposit-holders in an insolvent bank will then 
receive will be very greatly decreased — decreased, in my 
judgment, to such an extent that, after a series of these 
failures have occurred, especially in times of a panic, the 
public will come to appreciate the possibility of the severe 
losses which this first lien will inflict on them. Thus, by 
authorizing the issue of these uncovered notes with a first- 
lien provision, we shall lessen the amount of the deposit 
balances of the United States, and by lessening the con- 
fidence of the public of the United States in the banks 
as the proper custodians for their funds, we shall inflict 
the greatest damage upon our commerce and industry and 
prosperity. 

Now, a first lien is inherently a moral wrong. There is no 
inherent moral right about it. The money of the deposit- 
holding creditors of a bank has gone into the assets of the 
bank side by side with the money of the note-holding credi- 
tors, and when that bank fails we have no inherent moral 
right to say to the deposit-holding creditor: "Your dollar 
shall not be paid until and unless the dollar of the note- 



306 ESSAYS AND SPEECHES 

holder is paid in full." As I say, there is no inherent moral 
right about it. The contention is that a public necessity 
exists for a different kind of bank circulation from that in 
use at present; that in that public necessity for a different 
kind of circulation can be found justification for the moral 
wrong of a first lien. But my contention is that there is no 
such public necessity at this time in the United States as 
will justify that wrong. It is no argument to say that a 
note-holder possibly lives at a distance from the bank, and 
for that reason he has not the chance to determine the 
standing of the bank that the deposit-holder has, who does 
his business in closer contact with the bank. That is no 
ground which can be claimed as a justification for the great 
injustice to be done in the proposed distribution of the 
assets of an insolvent bank. As a matter of fact, the trust- 
worthiness of banks is not a matter, from the very nature of 
things, with which depositors can easily acquaint them- 
selves; not even the stockholders in a bank know very much 
about the bills receivable of their particular bank. A bank, 
to be successful, cannot publish its own business and the 
business of its customers to the world. The question of 
trustworthiness is left by the depositor to the bank exam- 
iners as representatives of the Government, and cannot be 
determined by a patron of a bank as a rule — there are 
exceptions, but not as a rule; and this is not a reason which 
justifies this radically and fundamentally different treat- 
ment in the two classes of creditors, to say that the note- 
holder is at a distance and therefore must be protected in 
preference to the depositor who is nearer. As a matter of 
fact, a deposit creditor of necessity must often trust banks 
at a distance. 

And this first lien, which is worshiped as a sort of fetish 
by currency orators — this first-lien provision is an excep- 
tion in the currency systems of the world. If one listens to 



PROPOSED CHANGES IN BANKING LAWS 307 

the speeches of these so-called reformers at this time, he 
would imagine that a first lien is something vitally neces- 
sary. There are only two countries in which the first lien 
exists, so far as I understand. It does not exist in France, 
England, or Germany. It exists in Canada — an unquali- 
fied first lien — and in Canada, in the future, is to be seen 
the first test in times of business adversity of the value of 
uncovered asset currency subject only to a nominal tax. In 
this country we have a qualified first lien, and what quali- 
fies the first lien is the fact that an unshrinkable asset has 
to be deposited with the Treasury of the United States 
before the notes can be issued. In other words, the pro- 
ceeds of those notes are invested in unshrinkable assets; so 
as a matter of experience, it has been demonstrated that the 
lien has not worked to the injustice of the deposit-holding 
creditors. But how would it have been under our system if 
that qualification, if that condition, had not existed? Un- 
der the present system of note issues, the proceeds of the 
notes are invested in an unshrinkable asset, to wit, United 
States Government bonds. Under the proposed system the 
notes will be invested in commercial assets, upon which, in 
the case of an insolvent bank, there is, of course, a shrink- 
age. Under the asset plans, not only must the depositor 
sustain a percentage of loss upon which his own money has 
been invested, but an additional loss of the same percentage 
upon the assets in which the note-holders' money is in- 
vested. Experience has demonstrated that there is practi- 
cally no shrinkage in government bonds, and that, there- 
fore, as a matter of fact, under the present system, the 
first-lien feature has not operated to the loss of the deposi- 
tor as it would under the asset system. As I have said be- 
fore, the first lien is bound to localize the losses on currency, 
and that localization of severe losses is one of the most dan- 
gerous features of this first-lien provision. I maintain that 



308 ESSAYS AND SPEECHES 

a first lien, unless the deposit-holding creditor is protected 
first by a requirement that an unshrinkable asset as secu- 
rity for bank-notes be deposited with an impartial trustee 
to protect him against losses made through bad investments 
of the notes, is a feature which would cause lack of confi- 
dence in the banks of this country, and cause a decrease in 
the deposit balances, and thus tend to bring about financial 
straits; for, as I have said before, the confidence of the 
people of the United States in the banks of the country 
is a most important thing to consider, and much more im- 
portant than a change in our form of bank currency at this 
time. 

I have made my speech thus far from the standpoint of 
an opponent of the present plans for reforms in our bank 
currency which are offered to the people. I believe in re- 
form in bank currency, but I do not believe that these par- 
ticular plans offered to us at this time are safe. We can, 
however, both secure reform and at the same time be safe. 
I admit that we need additional elasticity in our currency, 
but I believe that elasticity must not be obtained at the 
expense of the solidity and safety of the medium of ex- 
change, in which the business of this country is done. We 
need elasticity a great deal more in times of a panic than in 
the fall when the crops are to be moved. A panic in this or 
in any other country comes about so often, and we cannot 
avoid it. It comes through the ordinary and simple results 
of ordinary and simple business. In any country where the 
credit system is in effect as here, panics will come. A man 
makes a purchase of a piece of property for $5000. We will 
say he sells it for $10,000, and takes $5000 in cash and a 
note for the other $5000. The price of real estate rising, 
that man sells it for $15,000, and takes $5000 cash, and 
$5000 in a note payable in one year, and another note of 



PROPOSED CHANGES IN BANKING LAWS 309 

$5000 payable in two years; and so on, increasing in pro- 
portion to cash. Not only in the real estate business, but in 
all business, the credits of a country grow out of propor- 
tion to the cash in which those credits are redeemable, and 
sometimes hastened by speculation; but whether hastened 
or not, the time is sure to come when credits of a country 
get out of proper proportion to the cash in existence in 
which credits are redeemable. By and by there exists a 
great disproportion between the credits of a country and 
the cash in which they are redeemable. Some bright man 
sees it, and calls for payment of his note; another sees it, 
and calls in his note; a number of men see it, and call for 
their notes; and a general feeling of unrest and disquietude 
is developed; and suddenly you have frightened the great- 
est creditor class we have ever known, the depositors in the 
seventeen thousand banks of the country, and they become 
alarmed and call for their credit — the credit due them in 
the shape of deposit balances from the banks; and suddenly 
we are face to face with all the disasters and all the troubles 
which are incident to what we call a financial panic. 

We have a panic about every twenty years in this coun- 
try. There was the panic of 1817-18; the panic of 1837; the 
panic of 1857; the panic of 1873, hastened out of its time, 
perhaps, by the inflation incident to the Civil War; there 
was the panic of 1893; there is the panic which is off in the 
future. We cannot stop financial panics; but if it were pos- 
sible for us to evolve a plan for some sort of an emergency 
currency which would help the banks of the United States 
to tide over that period of tremendous demand for cancel- 
lation of deposit balances, we should have taken a great 
step forward in this matter of currency reform, and, in my 
judgment, the only practical step at this time toward the 
solution of these problems. The period of acute monetary 
demand is not long. The very height and climax of the 



310 ESSAYS AND SPEECHES 

panic of 1893 was reached in May, when it was impossible 
on certain days to borrow money upon government bonds, 
I am told, in New York City. Yet in October, 1893, six 
months after that period of acute demand, there was the 
largest collection of idle and unloanable funds in the banks 
of the United States which there had ever been since the 
foundation of our monetary system. The demand for more 
money at that time is short, not long. From the effects of a 
panic, of course, the country is years in recovering. It was 
five or six years after the panic of 1873 before stagnated 
industries commenced to revive. It was in 1898, five years 
after the panic of 1893, before this present period of great 
prosperity could be considered as fully started. But the 
acute demand for money — and a panic always arises out 
of a demand for sudden cancellation of debt — is for a pe- 
riod of but a short time. Now, can we find some method of 
issuing in time of panic additional bank credit in the shape 
of uncovered currency, because all asset currency is a form 
of banking credits, and a provision for asset notes at this 
time — mistake it not — is an argument in favor of allow- 
ing additional use of bank credits? An asset note is a form 
of banking credit, and it is a form of which the people will 
use only so much. Can we devise some method which at 
the time of a panic will allow the issuing of a small amount 
of additional bank credit without endangering the confi- 
dence of depositors in their deposits, and without the neces- 
sity of an unjust and wrong and demoralizing first lien in 
favor of uncovered asset note-holders? Any asset notes are 
a form of bank credit, and there is a limit to the amount of 
credit with which a business community can be saturated; 
and just in proportion as you saturate, in normal times, like 
the present, a community with bank credits in the shape of 
asset notes subject only to a small tax, you will lessen the 
ability of the banks to issue these notes in times of a panic. 



PROPOSED CHANGES IN BANKING LAWS 311 

Let us illustrate this point from this much-talked-of 
system in Canada. They have this asset-note system. To 
be sure, they cannot have any four thousand five hundred 
or five thousand banks to which to apply it. They have 
some thirty-eight centralized banks with branches to which 
to apply it. There is a fundamental and radical difference 
between the two systems. Let us see in what condition they 
now find themselves with their asset currency. On March 
30 the deposits in the Canadian banks amounted to about 
$418,000,000. Their banking capital amounted to about 
$73,000,000. The note issues at that time were about $58,- 
000,000; their cash resources about $80,000,000,-1 have 
not figured it exactly, — or about eighteen per cent of their 
deposits and note liability. They are allowed under the 
law to take out these asset notes up to the extent of the 
Capital of the banks. In other words, they have been au- 
thorized to put all the notes they can into circulation up to 
the extent of their capital, and they have been able thus 
far to get out $58,000,000. The time for the supreme test, 
the crisis for Canada, the time for the true test of her asset- 
currency system, is yet ahead of her and not behind her. 
When the panic comes it will be seen whether the elasticity 
of her currency system is sufficient to carry her through. 
The deposits of Canada are constantly increasing. Notes 
are kept afloat by the banks for the sake of the profit there 
is in it in these normal times. The elasticity of their cur- 
rency is more like wet leather, which stretches principally 
one way, than like rubber, which contracts and expands. 
Now, what help will Canada get during the next panic from 
this asset circulation? Since her banks have already is- 
sued about $58,000,000 out of an authorized issue of $73,- 
000,000 bank-notes, they can take out only an additional 
$15,000,000 in notes. That is less than five per cent of the 
combined deposit and note liabilities of the banks. Surely 



312 ESSAYS AND SPEECHES 

these asset notes will be more of a menace than a help to 
the Canadian banks in the next panic. 

If Canada, with its lesser business, and with its greater 
facilities for the redemption of asset notes, can keep in cir- 
culation $58,000,000, or about eighty per cent of their capi- 
tal, — can keep that amount afloat in the shape of asset 
notes, — how much easier would it be for five thousand 
national banks in the United States to keep twenty-five per 
cent of their capital in asset notes afloat! We shall not have 
an elastic currency under the Fowler Bill to the extent of 
twenty-five per cent of the capital of the banks of the 
United States, for these notes could be kept afloat in nor- 
mal times for the purpose of profit, and it is nonsense to 
talk of them, if issued under nominal taxation, as being 
of any material assistance in times of a panic. You would, 
under the Fowler Bill, be increasing the credits of the 
country at a time when we do not want increased credits. 
This is the time, above all others, to take in sail, not to put 
it out; and if we are influenced by arguments about the ne- 
cessity for more bank currency, we must be very sure that 
the new bank-notes are so guarded and so protected that 
they do not add to the danger which now confronts us, of 
too much extended credit, of too much speculation. In 
other words, we do not want at this particular time more 
credit money. We do not want an asset currency which 
will go out into business and be a foundation of still more 
business credits as well as being a credit in itself. We want 
some sort of a currency which can come out in panics, which 
can be used at such times to carry us through; and not a cur- 
rency which will help us into a panic while we are out of one. 
The crying need of the day is some sort of currency which 
can be used, not as an instrument of speculation and profit 
at the present time, but which will help tide us over in time 
of financial need. The bankers are just as anxious as all 



PROPOSED CHANGES IN BANKING LAWS 313 

other good citizens for any change in the currency system 
which will tend to make it more safe, and they stand, in my 
judgment, for only those reforms which will be good for the 
community as a whole; and this question of profit incident 
to a small expansion in the credit facilities of the banks is 
one that nobody considers of special importance except in 
its economic effect upon the country as a whole. It is a 
time when we should provide for trouble ahead, not lay the 
foundation for it. Therefore let us favor a small issue of 
asset notes subject to a high restrictive tax of four or five 
per cent — a tax high enough to provide for their redemp- 
tion without the necessity of a first lien, and high enough 
to prevent their use as an instrument of current profit in 
normal times, thus preserving them for use in times of pan- 
ics and financial emergency. This is the most practical 
step for us to take at this time. 

I hear it said that we conservatives are becoming edu- 
cated, by degrees, to the ideas of some of those who have 
been preaching to us so long and so radically on the subject 
of branch banking and asset currency. In my judgment, 
the education is in the other direction. If you compare the 
McCleary Bill, Secretary Gage's first bill, and other bills 
promulgated by some other gentlemen a few years ago, with 
the plan for asset currency as it exists at present, you will see 
a marked progression on the part of the so-called currency 
reformers to the standard which has been the standard up- 
held by the conservatives for several years, and not a pro- 
gression of the conservatives toward the more radical ideas 
of the so-called currency reformers. If we could have an 
emergency circulation, subject to a high tax, to be used in 
times of a panic, and not to be used as an instrument of cur- 
rency, profit, or speculation, we should advance in the right 
direction. This currency would come out for the general 
good, as well as for the good of the banks, and help tide over 



314 ESSAYS AND SPEECHES 

panic periods. It is no new plan, and there is nothing origi- 
nal about it. We have the experience of the world to guide 
us. They already have a system of repressive bank cur- 
rency tax in Germany. This tax, of necessity, must be so 
high as to provide without question for the redemption of 
the notes for the short time they are in circulation, without 
necessitating an unjust prior lien of the note-holder over 
the deposit-holder, and, when the need should be at an end, 
will force them into retirement again. And for that reform, 
it seems to me, we can safely stand. It is unwise to talk 
of joining the branch-banking question in the discussion of 
asset notes. 

We have a great country, with diversified conditions and 
customs. We want at this time something to go into law 
to help us, and we know there is no chance at this time 
of a branch-banking law. Let us combine and stand be- 
hind some simple step in advance. We do not have to-day 
any single man with the influence in financial discussion 
that Hamilton had in his day. The great men of to-day 
have not to such an extent the centralized confidence of 
the people of the United States. This is such a large coun* 
try now. In Hamilton's time the country was new, every- 
thing was new, all departments were being founded then, 
and great men could, comparatively unhampered and un- 
hindered, force into law their fundamental systems. To- 
day we have so many men in the country who are finan- 
ciers, there are so many different views and such a diversity 
of interests among our people, that to get together on some 
rallying-ground upon which all can combine for the pas- 
sage of legislation is a necessary thing and a difficult thing. 

I want to say one word more in connection with branch 
banking. The little country of Canada is held up to us as 
a model, notwithstanding the fact that you could take 
twenty banking systems like Canada's, put them side by 



PROPOSED CHANGES IN BANKING LAWS 315 

side, and they would not equal the strength or power of the 
banking system of the United States. The resources of all 
the banks of Canada are not equal to the resources of the 
banks of the one great city of New York in the United 
States. Then, why model a system of five thousand na- 
tional banks, scattered all over this great country, after a 
small banking system like that in Canada, and which has 
its real test ahead of it? We have here the greatest banking 
system in the world. I have heard it held up to great criti- 
cism. I have heard Americans visiting in Europe say they 
were ashamed of our banking system, or the banking 
system of the United States, in comparison with that of 
Europe* We have not built up the banking system of the 
United States upon the Continental idea. Two lines of 
thought have run along side by side in financial matters in 
the United States. The old banks of the United States — 
the First and the Second Banks of the United States — 
were the American expression of the idea of Continental 
banking, but we did not follow along that line. Possibly we 
made a mistake. I do not think so. We did not follow along 
in those lines, but built up a banking system upon another 
theory. The banking system in the United States was built 
up by protecting the rights and the opportunities of the 
small man and the small bank in business — built up from 
units, individuals, from the bottom up! The European sys- 
tem of centralized banks with branches was built from the 
top down. It has been of the greatest importance to this 
nation industrially that we have pursued the American idea 
in banking. It is the same idea that underlies the theory of 
protective tariff. Let the little man grow. Let him have a 
chance. Give the American a chance, and he soon grows in 
size and strength, so that in time commercially and finan- 
cially he will come to dominate the world. And he has in 
one sense done it in this banking system of ours, which at 



316 ESSAYS AND SPEECHES 

times is held up for ridicule and criticized severely in com- 
parison with the systems of Europe. This system of ours, 
this banking power of ours, in 1890 was a little more than 
the banking power of the United Kingdom, and a little less 
than the banking power of Continental Europe. Within ten 
years this banking power of ours has grown so that it is 
now within twelve per cent, not only of the banking power 
of the United Kingdom, but of the banking power of the 
United Kingdom and of Continental Europe put together. 
And we have built this system up by protecting the small 
banker. 

Now, however we may differ as to this question of 
branch banking, let me say right here, that as practical 
men, we all know that at this particular time there is no 
chance of a branch-banking law going upon our statute- 
books. Right or wrong, debatable question as it may be, 
there is at this time in the United States a widespread 
apprehension lest this great process of centralization and 
consolidation of industry and capital is not too greatly 
curtailing the opportunities and chances of the individual. 
Right or wrong, debatable as that question may be, we 
know that that apprehension exists. And we all know 
how futile it is to expect to have passed into law any 
change which removes existing restrictive provisions of law 
against branch-banking systems, and opens still further 
the way for the same process of consolidation and central- 
ization to go on in the banking business as is now going on 
in general commercial and industrial business. 

I do not want to be considered an obstructionist. I think 
it is time to take a step in advance, but to take a step that 
is safe. We do not want to consider the question of branch 
banking as a matter even for discussion among the bankers 
of the United States, as a thing at present practicable or 
possible. I do not think, as a matter of principle, we can 



PROPOSED CHANGES IN BANKING LAWS 317 

afford in this country to depart from our present theory of 
banking. Under it has been developed the greatest bank- 
ing system of the world. The time is not ripe for branch 
banking in this country, if such a time will ever come. 
We do not have to disagree entirely with the economists in 
holding this position. We know that the rates of interest on 
certain forms of collateral loans will be lower under a branch- 
banking system. We know that the farmer having grain, 
or any other commodity which has a cash value in the es- 
tablished markets, can through branch banking get a lower 
rate of interest. There will be fewer rooms to rent. There 
will be fewer clerks to employ. There will be certain econo- 
mies in the management of business, which might in the 
older and more fully developed communities in the East 
fully compensate the people for the loss of some of the ad- 
vantages the small bank gives to the community and the 
public. But it is doubtful. Branch banking would cer- 
tainly not aid in building up our undeveloped country, and 
the newer sections of the United States. He who would 
stand for the common good of all should argue the ques- 
tion from the standpoint of the people of the undeveloped 
country, and from the standpoint of the people building up 
a great and undeveloped country; for the United States as 
a whole is still undeveloped. If you discourage the small 
bank, you do not injure so much the depositors of the small 
community, but you curtail the opportunity for credit of 
the small borrower; and it is the small borrower of the 
United States who has built up the country. It is folly to 
maintain that an agent of a branch bank, acting at a 
distance under delegated authority, can exercise the same 
discretion and have the same latitude in the making of 
loans in which the personal equation is an element, as does 
the local bank acquainted with local conditions and author- 
ized to cope with a local situation. It is the man who goes 



318 ESSAYS AND SPEECHES 

in to start a little business — a little wholesale business, a 
small manufacturing business, a small mining business, or 
some other business of small beginnings — who has devel- 
oped and built up this country. He does not often have 
collateral. The money he borrows often forms a certain, 
and even large, proportion of the total investment made by 
him — money advanced him because he has character and 
standing with the local bank. The local banker knows him, 
has followed him, trusted him, and gives him credit upon 
his representations that he will pay, not upon his collateral. 
Out of the little shops of the Deerings and the McCormicks 
and of the Studebakers of years ago, and the little busi- 
nesses of such men, have grown these magnificent cor- 
porations which are commencing to dominate the world; 
and it is by the protection of the opportunity of the small 
man to secure credit that we are building up this great 
commonwealth of ours. The man who will bring out from 
this soil its riches, the man who will be a great manufac- 
turer, the great farmers of the future, — some of them are 
hard up now, — some are having trouble right now to pay 
back the little money advanced them with which to start 
their struggling industries by the small banker who trusted 
them, — some of them will go under, — but more of them 
will keep on, until this great State of yours, like this great 
nation of ours, shall dominate over its competitors through 
the rule of the "survival of the fittest," and the protection 
of the rights of the individual by law. 



DANGERS OF THE INITIATIVE AND 
REFERENDUM 

(Address at Banquet of Civic Federation of Chicago, February 4, 
1911. Stenographically reported) 

It was with some reluctance that I accepted the invita- 
tion of the Civic Federation to speak upon this most im- 
portant subject, for I had made no extensive preparation 
for it; but when the fundamental principles of the Gov- 
ernment, which we love so well, are attacked, it needs no 
great preparation upon the part of any speaker to defend 
them, and no American citizen should refuse to give his 
views when asked. 

We believe in this country in the people, and in the ul- 
timate voice of the people. In anything that I may have 
to say I wish no inference to arise that in common with all 
believers in the principles of representative republican 
government, I do not have full confidence in the justice 
and the ultimate right of any decision which comes from 
the deliberate voice of the people. But, my friends, this 
whole government was based upon the view which our 
forefathers in their wisdom took, that the voice of the 
people which was to be trusted, must be deliberate. It 
must be well considered. Our Government was so framed 
that its actions must be evolved from the best judgments 
of the people; not a temporary judgment based upon an 
incomplete consideration of the question at stake, not a 
judgment for which simply the demagogue and the radi- 
cal were alone responsible, but the judgment which came 
after both sides had been heard; after the measure em- 
bodying that judgment had passed through one House of 



320 ESSAYS AND SPEECHES 

Congress to which Representatives were elected by the 
people; after the measure had passed through another 
House of Congress where the members were elected by a 
body of representatives from the people, after that meas- 
ure had been placed before the President of the United 
States for his review and been approved, or if disapproved 
had been sent back to both houses of Congress to pass over 
his veto, by a two-thirds vote, and then finally, if desired 
by any citizen, after a body of men appointed for life that 
they might be removed from the clamor of the unthink- 
ing, — out of reach of the arguments of the demagogue 
which appeal to passion and to prejudice, — a body of 
men unbiased and fair-minded, should have passed in 
final review upon that measure and ascertained whether 
or not it was in accordance with the Constitution of the 
United States, which is the cornerstone of our magnificent 
governmental edifice. 

The men who framed the Constitution of the United 
States recognized the great truth that generally a tempo- 
rary expression of popular will is not what the people them- 
selves wish when they have had time for consideration, 
and that ultimate popular judgments should be deliber- 
ate. It is because of the recognition of that principle by 
the Constitution of the United States that this Govern- 
ment exists to-day and will exist hereafter. 

Abuses have sprung up. Corruption has entered some 
of our legislatures now and in the past. The different 
States have encountered the storms through which every 
government must sail which lasts, — our nation itself has 
been tempest-tossed, — but we have sailed safely through 
because the Constitution of our Government made it nec- 
essary for the people to act deliberately, even under great 
provocation. 

A community is like other associations of men, and in 



INITIATIVE AND REFERENDUM 321 

all associations of men banded together for a common 
purpose, and in every community banded together for the 
purpose of government there is a conflict at certain points 
between the rights of the individual and the rights of the 
mass of men of the community in which the individual 
lives. All government is in one sense a compromise, be- 
tween the rights of the individual and the rights of the 
community, which must curtail the rights of the individ- 
ual in the interests of the common good. 

And so we find in every successful body of men, whether 
it be a corporation or whether it be a trades union or 
whether it be a county, a city, a state, or a nation, that 
all the time the successful organization is founded upon a 
system of checks and balances which demands and which 
compels careful and deliberate consideration of important 
questions relating to its welfare and to the rights of its 
constituent elements. 

I think, perhaps, there is no body of laboring men which 
has been more successful in securing the recognition of 
their just demands than any one of the different brother- 
hoods of railway employees. I do not remember — I knew 
at one time — the exact system of checks and balances 
which the employees of the railroads in their different or- 
ganizations impose upon themselves before they determine 
upon that last resort — the paralyzing of the transporta- 
tion business of the United States by a strike; but I do 
know that after the question has been proposed it has to 
pass authority after authority before it comes to the Grand 
Master of the organization himself, and then taken from 
him to the Grand Masters of the allied organizations of 
the railroad employees, in joint council. And it was be- 
cause the demand was made when it had passed that sys- 
tem of checks and balances, that it had a like consideration 
of the gentlemen interested on the other side which led in 



322 ESSAYS AND SPEECHES 

nine cases out of ten to the peaceful settlement of the diffi- 
culty, and as a rule in favor of the men. 

The most successful system under which organizations 
of men work is that which gives those in authority, who 
have considered all the matters relative to a decision, time 
to work out the policy which they deem wise, and to give 
the reasons for and against its adoption, and thus command 
the ultimate support of a constituency fully enlightened as 
to both sides of the question. 

I cannot discuss in detail the different forms which the 
Initiative and Referendum takes. The principle underly- 
ing the idea seems to be to get away from the old system 
of checks and balances which make up the foundation of 
representative republican government. It is to get some 
short cut to the immediate adoption of that which is tem- 
porarily in demand, notwithstanding history shows that 
that which is in temporary demand among the people of 
the United States is by no means that which they always 
ultimately wish. And no measure which seeks to take away 
from the people a system which compels them to give 
proper deliberation to a question, is for the ultimate bene- 
fit of the people of the United States themselves. 

One of the proposals generally made in close relation to 
the Initiative and Referendum is to give the people the 
right to recall a public official from office before his term 
expires. 

Suppose we had had this power of recall vested in the 
people of the United States when Abraham Lincoln stood 
against the voice of the radical and the voice of the aggres- 
sive, and against the clamor of the unthinking, against 
the thousands of those demanding that he take imme- 
diate action on this or that question, and that in con- 
sequence he had been compelled either to be precipitate 
in some of those issues upon which hung the safety of 



INITIATIVE AND REFERENDUM 323 

this Republic or to abandon the helm of the struggling ship 
of state. 

Every great man in our history whose memory the peo- 
ple love and revere has had at one time to stand against 
what was the immediate positive popular demand for ac- 
tion, and it was because he stood against the demand that 
we to-day look upon him as great. 

The men who stand as the beacon lights in American 
history were not the men who were always at the head of 
every popular movement among the people of the United 
States, and if this country is to endure, this kind of a man, 
in the future of our country as much if not more than in 
the past, must have his opportunity to stand by his policy 
amidst the clamor of the majority against him at the time 
being. 

My father fought in command of the Sixth Wisconsin in 
the battle of the Wilderness, and I have read the letters 
which he wrote in the trenches during that awful time. I 
remember how he rebelled at the policy of General Grant 
as his splendid regiment was slowly shot to pieces and his 
best friends who had been with him for so long through 
that awful war were one by one killed or wounded and man- 
gled. I have read the letters that he wrote with a breaking 
heart, protesting against the wiping-out of one of the great- 
est armies that this world has ever known. And yet, I lived 
to hear him say that the policy of General Grant, when 
inch by inch he ground the greater stone of the North 
against the lesser stone of the South, was what saved this 
Republic, and that he — not General Grant — had been 
mistaken. 

Suppose that there had been the right of recall among 
the soldiers of the Army of the Potomac during the battle 
of the Wilderness! Suppose that General Grant had not 
had the chance to work out his policy! Suppose that Grant 



324 ESSAYS AND SPEECHES 

had not had the chance to save this government! My 
friends! In government as in war, before an Appomattox 
we cannot always avoid a Wilderness. 

We have had instances where popular clamor had its 
way. This country even yet does not forget the humilia- 
tion it suffered at the beginning of the Civil War when the 
time which was being taken by wise men for the prepara- 
tion of the forces of the North was too long for the impa- 
tience of a people bent on action, and we had the cry " On to 
Richmond! On to Richmond! " and a brave army was sent 
to battle contrary to sound judgment, in response to an 
overpowering demand of a people who were not informed 
of the real situation, and as a result came the crushing, 
bitter, terrible humiliation of Bull Run. 

Do not make of your Republic a Bull Run ! I saw Presi- 
dent McKinley at the beginning of the Spanish War, when 
he put in jeopardy his leadership of his party and of his 
people in his endeavor to avert the war as well as to obtain 
time for adequate military preparation, and an almost 
overwhelming demand came from the people for immediate 
action, but his firmness in not yielding to it, gentlemen, is 
his true claim upon fame. 

And so it is in connection with all public men, and so it 
will be in connection with all republican forms of govern- 
ment. If this Government is to last, the people of the 
United States must voice always their ultimate conviction 
in vital matters, and the history of this nation shows that 
under our present system, the ultimate voice of the people 
in time does control, and upon that fact is based our safety. 

To whom should we listen, my friends, in days like this? 
To the radical altogether? No. In part, yes. To the con- 
servative altogether? No. In part, yes. 

If we are to progress, as Professor Laughlin has said, we 
must listen to the radical; if we are not to go upon the 



INITIATIVE AND REFERENDUM 325 

rocks we must listen to the conservative. And in connec- 
tion with this great measure which is proposed to be passed 
by the people of the State of Illinois at this time, we may- 
make, by a hasty decision, one of those great mistakes from 
which it would take us a long time to recover. 

We have the instances to which we have listened to- 
night. As I understand it, the law which it is proposed to 
pass is much like that which they have in Oregon, and I 
would ask that we proceed to inform ourselves as to both 
sides of so important a question. 



THE NATIONAL RESERVE ASSOCIATION 
IS NOT A CENTRAL BANK 

(Collier's Weekly, June $&, 1911) 

A matter of the greatest importance to the average man 
is the proper settlement of the problem presented by the 
present defective monetary system of the country. For 
decades the effort has been made to solve it, and gradually, 
students of the question, originally far apart in their views, 
have become more united until they now are practically a 
unit behind the principles of the Aldrich plan for a Na- 
tional Reserve Association. But after the economists and 
specialists have united, there comes the most important 
step of all — to reach the understanding and secure the 
support of the average man for the plan. If the Aldrich 
plan is to be adopted, the average man must be made to 
know, in the most unmistakable way, that it is not a cen- 
tral-bank plan. In their arguments in support of the meas- 
ure, many of the specialists are overlooking the fact that 
the people are not so much interested in details as they are 
in fundamental principles, and little effort has yet been 
made to emphasize in their minds the radical differences 
between the Aldrich plan and the central-bank plan. 

The Aldrich plan for a reserve association is designed to 
secure to the business interests of the United States the ad- 
vantages, without the disadvantages, of the central bank. 
While I have opposed the central bank as impracticable in 
the United States, I strongly favor the general principles of 
a plan for a reserve association with only slight modifica- 
tions. The reserve association is not a central bank, like 
the First and Second Banks of the United States, which 



NATIONAL RESERVE ASSOCIATION 327 

were banks designed to transact business with the com- 
munity generally. 

The reserve association, since it does not accept deposits 
except from the banks and Government, and does not pay 
interest on deposits nor make loans to the business com- 
munity in competition with the independent banks, may 
be regarded as the agent of our present great competitive 
independent banking system. Public services of vast im- 
portance to our people, similar to those rendered in Europe 
through central banks, can be performed by the reserve as- 
sociation without in any way impairing the present func- 
tions of our independent banking system. While preserv- 
ing all the powers for good of a central bank, it does not 
gain them by weakening the present competitive system. 
It serves as a means by which this system, in its present 
form, can better serve the business community. The ad- 
vantages of the reserve-association plan over the central- 
bank plan may be stated as follows : — 

1. It is a development of the present independent 
banking system of the United States, and not a depar- 
ture from it. 

2. The reserve association will tend to maintain the 
present system of independent banks and to increase its 
importance instead of lessening it. 

3. The fact that stockholders of the reserve association 
will be the national banks, widely distributed in ownership 
and location, and the method of selecting the boards of the 
local reserve association insures, of necessity, a proper su- 
pervision and conduct of the branches of the central re- 
serve association, whereas it was the incompetent conduct 
of the branches of the Second Bank of the United States 
which at one time nearly wrecked it and at other times ma- 
terially interfered with its highest effectiveness. 

4. Because of the distribution of the stock of the reserve 



328 ESSAYS AND SPEECHES 

association among local banks, and the fact that the local 
banks are represented on the boards of the local associa- 
tions and the central reserve association, and interested 
in its business, the association will not be subject in the 
same degree to the demagogic attacks which were the 
great menace to the old central banks. The most power- 
ful enemies of the old central banks were the compet- 
ing independent banks. Every Congressman inclined to 
demagogism will have to deal with an interested local 
constituency favoring the reserve association, where in 
times past the local banks encouraged radical attacks upon 
the competitive central bank. 

The reserve association plan will secure to the country 
the following benefits : — 

1. In general, it will enable the system of independent 
banks to exercise collectively, and therefore much more 
effectively, the precautionary measures which each prop- 
erly managed independent bank endeavors, for the pro- 
tection of its customers and itself, to exercise at present, 
with additional powers for the betterment and facilitation 
of general business possible only through united action. 

2. It will provide an elastic currency, consisting of notes 
of the central reserve association, which can be secured by 
the local associations through the rediscount of commer- 
cial bills receivable of short maturity. 

3. It will provide a delegated, but a central, power with 
the opportunity to regulate in a general way the expansion 
and contraction of this currency to accord with the neces- 
sities of business and commerce by alteration of the dis- 
count rate, and through its sole control of the right to make 
note issues. 

4. It will provide an opportunity for the reserve associa- 
tion to regulate the general conditions of banking and com- 
mercial credits in a helpful way by supplying credits itself 



NATIONAL RESERVE ASSOCIATION 329 

and by checking tendencies toward too great a dispropor- 
tion between banking credits, including bank-notes and 
cash reserves, including its own, and to prevent depletion 
of bank reserves by supplying its own notes when otherwise 
the reserves would have to be paid out, resulting in a cor- 
responding larger contraction of commercial credits. 

5. It will have, in these purposes, the assistance of gov- 
ernmental financial relations, and will render the Govern- 
ment in its financial administration reciprocal and equiva- 
lent service for this assistance. 

6. It will provide an opportunity practically to protect, 
by means of its discount rates, the gold holdings of the 
country from exportation, since by raising rates of interest, 
it tends to lessen the incentive for shipment of gold to 
points where higher rates of interest prevail. 

7. It will mobilize the bank reserves of the country, so 
that they can be used at critical times where most needed, 
and with a power for good impossible under the scattered 
reserve system, without the power of cooperation which 
the reserve association provides. 



THE ALDRICH BILL 

(Address before the Committee on Banking and Currency of the House 
of Representatives at a Hearing on the Aldrich Bill, Washington, 
D.C., April U, 1908) 

The committee met at 10.30 o'clock a.m. 

Present: Representatives Fowler (chairman), Prince, 
Waldo, Hayes, Weeks, Burton, Durey, Pujo, Gillespie, 
James, Crawford, and McHenry. 

STATEMENT OF CHARLES G. DAWES, ESQ., OF CHICAGO, ILL. 

Mr. Prince. Mr. Dawes, will you give your name and 
residence? 

Mr. Dawes. Charles G. Dawes, Evanston, Illinois. 

The Chairman. What is your occupation? 

Mr. Dawes. I am president of the Central Trust Com- 
pany of Illinois. 

The Chairman. Located at Chicago? 

Mr. Dawes. Located at Chicago. 

Mr. Prince. You were formerly Comptroller of the Cur- 
rency? 

Mr. Dawes. Yes, sir. 

Mr. Prince. Between what years? 

Mr. Dawes. From 1898 to 1901, 1 believe. 

Mr. Prince. Is the bank of which you are president a 
commercial bank? 

Mr. Dawes. The bank of which I am president is a state 
bank. Yes; we do a commercial business. 

Mr. Prince. Does it do a regular commercial business? 

Mr. Dawes. Yes. We do not take commercial paper. We 
loan only on collateral; but we do a regular commercial 
business, with checking accounts. 



THE ALDRICH BILL 331 

Mr. Prince. You do a checking-account business? 

Mr. Dawes. Just here, gentlemen, let me say — 

Mr. Prince. Just let me ask you one or two more pre- 
liminary questions, to get them clear in the record. 

Mr. Dawes. Yes; go ahead. 

Mr. Prince. If this Aldrich Bill, that is now under dis- 
cussion, should become a law, would you avail yourself of 
its privileges? 

Mr. Dawes. I do not know; I have not considered that 
matter as yet. 

Mr. Prince. Could the bank of which you are president 
avail itself of its privileges now? 

Mr. Dawes. Ours is not a national bank; therefore we 
could not avail ourselves of its provisions. 

Mr. Prince. That is what I am getting at. Let me ask 
you a further question : If this bill should become a law, 
would you change your present form of bank into a na- 
tional bank in order to get the privileges of it? 

Mr. Dawes. I do not know, Mr. Prince. I have come 
here to speak from a general standpoint about the Aldrich 
Bill. It is a matter of no interest to this country as to 
whether my bank would avail itself of the provisions of 
the Aldrich Act or not. If you will please let me proceed 
now with a general statement upon this bill, after I get 
through I shall be very glad, indeed, to answer any ques- 
tions that I am able to answer. But I would like, if I can 
without interruption, to make a statement upon this bill 
as I see it from its general standpoint, not with reference to 
my bank or any particular bank, but with reference to the 
interests of the country as a whole. 

Mr. Prince. All that I wanted, Mr. Dawes, was to have 
the House and the country know exactly the conditions as 
they appear before the committee. I do not wish to cate- 
chize you, and I do not wish to interrupt you. Go on now 



332 ESSAYS AND SPEECHES 

in your own way. I simply wanted to show the facts as 
they exist. 

Mr. Dawes. In the first place, I want to say, in connec- 
tion with the Aldrich Bill, which has passed the Senate, 
that I do not appear as advocating the passage of that bill 
in its entirety. I believe, as do most of those who have ap- 
peared before this committee, that the section relating to 
loans upon securities in which directors of the banks are in- 
terested — the number of the section I have forgotten — 
is unwise. 

Mr. Prince. It is section 11. 

Mr. Dawes. Yes; section 11. I believe it is unwise, and 
should be eliminated from the bill. But I do wish to make 
an argument for the general principles embodied in the bill 
and to point out the necessity that exists at this time for 
the enactment of substantially the provisions of the Al- 
drich Bill in regard to emergency circulation and in con- 
nection with national banking reserves. 

Before taking up the detailed argument in this connec- 
tion, I want to say that we are confronted by a necessity 
in this nation for remedial legislation of some sort. We 
were confronted by that necessity in the panic of 1893 
which first brought to the attention of the people as a whole 
the defects of our national banking system. At that time, 
which was a time of emergency and crisis, as at this time, 
there was a widespread discussion and quite a general 
effort made to get united support behind some measure 
which could pass through Congress and relieve the na- 
tional banking system from the situation in which it was 
and from its inability properly to respond to the needs of 
the country. But there was an utter inability to agree 
among the financial doctors of the United States at that 
time, as there seems to be at this time, after the passage of 
some fourteen years, among those who believe in radical 



THE ALDRICH BILL 

changes in the national banking system of the United 
States. 

This is no time for the discussion of branch-banking 
laws, of laws authorizing the establishment of a central 
bank, of laws radically changing the method of note issues. 
This, I say, is not the time for the discussion of those 
measures as of practical importance in connection with this 
session of Congress and with this emergency. I say that 
for the reason that there has been demonstrated the abso- 
lute impossibility of the financial doctors of this country 
themselves uniting upon any one measure, just as there was 
at the time of the last emergency. And because of their in- 
ability to unite, this country has gone without the protec- 
tion which it should have had put into our statute-books 
at that time until we have gone into this panic and through 
it without such laws. We had at that time the Baltimore 
plan; we had at that time the Walker plan; we had at that 
time the Indianapolis commission plan; we had at that 
time Secretary Gage's plan; we had at that time Mr. 
McCleary's plan; we had at that time Secretary Carlisle's 
plan. We have now the American Bankers' Association 
plan; we have Mr. Fowler's plan; we have Mr. Ridgeley's 
plan for a central bank; we have the New York Chamber 
of Commerce plan; we have almost innumerable plans com- 
ing from all over the country suggesting radical changes in 
our national banking system. And I say that we are con- 
fronted by a condition of public sentiment in the country 
at this time which makes impossible of legislative enact- 
ment any radical change in our national banking system. 

We have been through a panic in the United States in 
which the banks in the central reserve cities over this coun- 
try largely repudiated their debts. Let us see just what 
that means. 

Suppose that down in a country town the retailers 



334 ESSAYS AND SPEECHES 

should get together and say to the wholesaler who came to 
collect a debt: "We have agreed among ourselves to pay 
you in due bills." Those men, in my judgment, would soon 
have the sheriff to deal with. But the banks in the central 
reserve cities of the United States, when a banker from 
a little town came and asked in currency for the deposit 
which was due him under the contract, sent him home 
without it, or with only a part of it, throughout almost all 
of this United States. It was repudiation. The banks got 
out clearing-house certificates. And what was one of the 
purposes of those clearing-house certificates, which is so 
often overlooked? It was to enable the banks safely to re- 
pudiate the obligation upon them to pay in currency and 
in lawful money. For under the clearing-house arrange- 
ment, if I were a city banker, and any one should come to 
my bank and ask for his deposit, and I should say, "I will 
give you only a portion of it in currency," if the clearing- 
house certificate system was not in effect he would go home 
and put in a check upon my bank through the Continental 
National Bank of Chicago, or the First National Bank of 
Chicago, and I would have to settle in currency through 
the clearing-house for that check. 

So that these clearing-house arrangements are a fence 
around the lawful money of the central reserve city banks 
and the reserve city banks to enable them safely to say 
"no" to the man who comes to collect his deposit in cash 
in order to meet the customers whom he has to face over 
his counter. Take the little banks all over this country 
which are isolated, with perhaps no other national bank in 
the town; they have to meet face to face their customer who 
demands his money. They do not have the moral support 
of a number of other banks with obligations doing the same 
thing. They are unprotected and alone. This clearing- 
house arrangement in the cities is perfectly justified under 



THE ALDRICH BILL 335 

the law of public necessity; it is justified in public senti- 
ment; it is justified morally because of the greater evil that 
would come to the business of the country if the banks did 
not take this means of self -protection and did not repudiate 
in this way; and those considerations greatly overshadow 
the moral wrong involved in the refusal in a time of panic 
of the reserve cities to cash the deposits of the country 
bankers. But the country banker is the man who has been 
left largely exposed in this last panic; and the question of 
the relation of the reserve held by the country banker to 
his deposit liabilities is one of the most important ques- 
tions involved in this Aldrich Bill. 

But the point that I wish to make first is that if it is 
possible at this time — call it unscientific if you like; call 
it in subversion of economic principles if you like — to 
pass the kind of law that will enable the banks in the re- 
serve cities to pay their debts in a time of panic, it should 
be done by all means. And I maintain that a grave mistake 
is made by any man or any set of men who maintain that 
nothing should be done at this time to right this intolerable 
situation, which comes up every time we have a general 
contraction of credits in the United States, simply because 
a remedy which is confessedly possible of legislative enact- 
ment is " unscientific* ' or "tending in the wrong direc- 
tion." 

We want the national banking system of the United 
States put in such a condition that the business of the 
United States in these times of emergency can be pro- 
tected. And I say that those men are making a mistake 
who say now, "Do nothing,' ' simply because away off in 
the future, when we can agree upon a branch-banking bill, 
when we can agree upon a central bank, when we can agree 
upon an asset currency, we shall be able to do it with less 
difficulty than if this statute is passed at this time. 



336 ESSAYS AND SPEECHES 

We should have relief at this time for the protection of 
the business interests of the country. The loss and the 
misery that are caused by repudiation by banks we all 
know. And it seems at this time, since this bill has passed 
the upper House, that there can be enacted into legislation 
some remedial bill, provided it is not in conflict with the 
fundamental principles which, right or wrong, have under- 
lain our banking system. 

We proceed slowly in this country. We have prejudices 
to confront in this country. We must have united effort. 
We must have concessions made in order to get through any 
legislation. And I think I can say without contradiction 
that no bill radically changing our banking system can be 
passed, at this session of Congress, at least. Now, how can 
any radical legislation be enacted later, if, with all the ob- 
ject lessons pointing to the necessity of a change which ex- 
ist before this Congress, which exist before this people, just 
out of the panic of 1907 — how, at any time in the near 
future, can radical legislation be passed if temporary re- 
medial legislation cannot be passed at this time, owing to 
the prejudiced efforts which are made against it? 

Suppose you introduce for general discussion before the 
country the proposition of asset currency. Let the people 
of this country believe that that is possible of legislative 
enactment — let the people of this country, with all the 
prejudice which has been created against the process of cen- 
tralization in other lines of business, believe that there is a 
chance for the passage of a bill establishing a central bank, 
or branch banking, which will enable the laws of business 
to be applied unfettered to the banking business, and see 
what the opposition will be. You have not developed the 
opposition in the United States to radical changes of our 
banking laws, for the reason that the people do not think 
that there is a chance, that Congress does not think that 



THE ALDRICH BILL 337 

there is a chance, of their being made. And if remedial 
legislation is not had at this time, this country will have 
to go through another panic unprotected; these reserve 
cities will again repudiate, of necessity and rightfully; 
and we shall again be face to face in the future with all 
that we have passed through in the recent past. And the 
men who will be responsible for that condition will be the 
obstructionists at this time when, upon some remedial mea- 
sure, it does at last seem possible to get action by Congress. 
I want now to discuss the reserve feature of the Aldrich 
Bill and to say that in my judgment never has a bill been 
so misrepresented before the people of the United States 
as has this Aldrich Bill in connection with its reserve 
requirements. I have here resolutions of clearing-houses 
which have been passed throughout the United States, 
starting with the resolution of the Chicago Clearing-House. 
In that resolution it says : — 

Whereas the Aldrich Bill changes the legal reserve requirements 
of the National Banking Act which have stood for forty years, so 
that nearly $200,000,000 of lawful money, or about one sixth of 
the lawful money holdings of the national banks, must be with- 
drawn from loanable use and locked up in vaults or invested in 
certain specified bonds: Therefore be it 

Resolved (1) That the transfer of this money from the liquid 
reserves of the banks, where it is available for loans, to an idle 
fund, which the banks are forbidden under any circumstances to 
encroach upon, will seriously impair the working capital of the 
country. It is not merely a transfer of money from reserve cities 
to other localities, but a definite withdrawal of money from use 
as a basis of bank credits. The total lawful money holdings of all 
the national banks on December 3, 1907, according to the state- 
ments of that date to the Comptroller of the Currency, were 
$1,045,795,019, on the basis of which the banks had outstanding 
loans of $4,585,337,094. If the available cash in their vaults at 
that time had been reduced as proposed by the Aldrich Bill, the 
banks would have been obliged to contract their loans by approxi- 
mately $1,000,000,000. We submit that such a reduction in the 



338 ESSAYS AND SPEECHES 

loaning power of the banks concerns the business community 
quite as much as it does the banks. It means restricted accommo- 
dations to the business men, higher interest rates upon commer- 
cial loans, and a permanent burden upon the country in the form 
of returns upon idle capital, the system of reserves in this country 
being already more costly than that of any other country. 

That comes from the clearing-house of the city of Chi- 
cago; the intimation being that a loan contraction of 
$1,000,000,000 may be caused by the passage of the Aldrich 
Bill. 

Then come the other clearing-houses in the wake. Here 
is one from Lincoln, Nebraska, to practically the same 
effect. Here is a letter from the ex-president of the Ameri- 
can Bankers' Association. Notice that these resolutions 
are being sent out by the thousands: — 

Gentlemen : The Aldrich Bill has passed the Senate and is now 
before the Committee on Banking and Currency of Congress. 

This measure as it has been amended is a dangerous bill. In- 
stead of giving us an emergency currency of $500,000,000 to meet 
the constantly growing demands of trade, it takes from the re- 
serve cities $221,143,179, and ties up in the reserves of the coun- 
try $571,265,496, of which amount $147,428,786 shall be in bond 
securities, which precludes the possibility of these bonds being 
used to secure emergency circulation. 

And so on. 

I say that no bill has been so misrepresented in its gen- 
eral effects as has this bill. That is evidenced by these in- 
timations that it will be necessary to contract the loans of 
this country $1,000,000,000 because of the Aldrich Bill. 
Let us analyze the effect of the reserve provision of the 
Aldrich Bill; for if that would be so, unquestionably it 
should be stricken out of the bill. It is not so. I have taken 
the trouble to make a careful computation on that point 
from statistics obtained from the Comptroller's Office — 
not from the statement of December 3, which is not rele- 



THE ALDRICH BILL 339 

vant, but from the last statement — showing the con- 
dition of the banks as they are at the nearest available 
date. 

On February 14, 1908 (the central reserve cities are not 
included in the following statement, for the Aldrich Bill 
does not change them), the lawful money on hand in the 
country national banks was $232,373,202. This does in- 
clude the insular possessions, whose banks are very small. 
The Aldrich bill requirement of four fifths of the fifteen 
per cent reserve upon which these banks are allowed to 
do business amounts to $295,255,488, of which $98,418,496 
can be carried in bonds as provided for in the bill. So that 
the lawful money requirements under the Aldrich Bill are 
$196,836,992. Subtracting that from the amount of lawful 
money which they had on hand, there is an excess at this 
time in lawful money over the Aldrich Bill requirements. 

Mr. Prince. Would it be proper to ask you a question 
right there, in connection with that statement? 

Mr. Dawes. Yes, sir. 

Mr. Prince. It has been stated before the committee 
that for about nine months of the year there is a redun- 
dancy of currency; that during the crop-moving season of 
the year there is a greater demand for currency, and that 
if the provisions of the Aldrich Bill with reference to the 
reserve were in force during those crop-moving seasons of 
the year (to illustrate, at Minneapolis and St. Paul), they 
would be absolutely helpless to comply with the provisions 
of the bill and at the same time give the currency necessary 
to move the crops. You are giving, if I get your statement 
correctly, the statement of the month of February, when 
the banks throughout the United States, as a result of this 
currency trouble, had been piling up reserves in their 
banks. What is your answer to the other statement as to 
the crop-moving season? 



340 ESSAYS AND SPEECHES 

Mr. Dawes. Mr. Prince, I will ask the stenographer later 
to read your question, which I shall answer as soon as I 
finish on this particular point. 

Mr. Prince. Very well; I did not want to interrupt you, 
but that inquiry was germane at this point. 

Mr. Dawes. Yes; it is germane, and I want to take it up. 

In reserve cities, the lawful money on hand at the present 
time is $200,362,786. The Aldrich Bill requirements would 
be $219,488,306, less the amount which they are author- 
ized to carry in bonds, $36,581,384. Subtracting that sum 
of $182,906,922, which represents the net requirements of 
the Aldrich Bill in lawful money, the excess of lawful money 
now held by the banks over the Aldrich Bill requirements 
in reserve cities is $17,455,864. The total of excess over 
the Aldrich Bill requirements of the reserve city banks and 
the country banks (not including, of course, the central re- 
serve cities, which are not changed by this bill) is $52,992,- 
073. In addition to this surplus of $52,992,073 over the 
Aldrich Bill requirements in country banks and in the re- 
serve cities, the central reserve cities of the United States 
now hold a surplus over their twenty-five per cent reserve 
in lawful money of $45,576,494. So that the grand total of 
surplus in lawful money now held by the banks of the 
United States over the Aldrich Bill requirements is $98,- 
568,567. 

Now, tell me where there is a basis for the statement, or 
room for the inference to be drawn, that we are facing a 
contraction of loans of $1,000,000,000 as a result of the 
passage of the Aldrich Bill? The Aldrich Bill will require 
the investment in these municipal and public bonds of 
$134,999,880. 

The Chairman. That is the amount to be put into the 
bonds? 

Mr. Dawes. That is the amount to be put into the bonds. 



THE ALDRICH BILL 341 

Mr. Gillespie. In their reserve? 

Mr. Dawes. In their reserve, to be carried as a reserve. 

Mr. Prince. Let me ask this question : Does that mean, 
also, the bonds that are required by the very first section 
of the bill, which uses the language "any national banking 
association which has circulating notes outstanding secured 
by the deposit of the United States bonds to an amount of 
not less than fifty per cent of its capital stock?" Is it not 
true that many national banks do not have fifty per cent 
of their present capital stock in United States bonds? 

Mr. Dawes. Oh, yes; that is true. 

Mr. Prince. Have you figured the amount that will be 
required in United States bonds to comply with the very 
first section of this act? 

Mr. Dawes. I have not figured that amount; no, sir. 

Mr. Prince. I will ask you if it would not be a large 
amount? 

Mr. Dawes. If I have not figured it, I cannot answer as 
to how large it would be, Mr. Prince. 

Mr. Prince. As the former Comptroller of the Currency, 
have you any present knowledge, or means of giving to the 
committee the information, as to how many bonds would 
be required to comply with that provision of the bill? 

Mr. Dawes. The larger the amount of bonds which would 
be required to comply with that provision of the bill, Mr. 
Prince, the smaller the amount they would have to buy of 
these municipal bonds, because of the smaller amount of 
currency they would take out. 

Mr. Prince. Oh, no; I beg your pardon. Before they can 
avail themselves of the provisions of the bill, they have 
to- 
iler. Dawes. I understand; but I am discussing now the 
ability of the national banks of the United States to stand 
the passage of the Aldrich Bill in connection with the move- 



342 ESSAYS AND SPEECHES 

ment of lawful money and in connection with that question 
of loan contraction. 

Mr. Prince. Yes; but you have a double class of bonds. 

Mr. Dawes. Wait a minute. I understand; and I will try 
to take up that point in a minute. I have shown that, ut- 
terly irrespective of the bond question (to which I was al- 
luding incidentally), the banks of the United States have 
now $98,000,000 of an excess in lawful money over that 
required amount. As to the amount of additional United 
States bonds that they would have to buy, the total capital 
of the banks is at this time something over $900,000,000 
and the amount of the bonds to secure circulation is, in 
round numbers, $600,000,000. The Aldrich Bill would re- 
quire them to hold only about $450,000,000. As to how 
they are apportioned, whether between banks in reserve 
cities or outside or banks in central reserve cities, of 
course, would not affect this question one way or the other. 
That particular point I have not figured. 

Mr. Prince. I wanted to know about that, because that 
is creating a value for bonds that enters into this whole 
question and results in absorbing that much actual capital 
before the banks can operate. No one has seemed to touch 
upon that point. 

(At this point, by request, the stenographer read aloud 
portions of the foregoing questions by Mr. Prince.) 

Mr. Dawes. The purpose of that question is to indicate 
that a larger proportion of the cash moneys, as I under- 
stand (for that is what you are discussing now), will be tied 
up because of the necessity of the banks to purchase these 
bonds? 

Mr. Prince. The question is a double question. What I 
want to get at is this: First, will it not require the tying- 
up of money in these bonds? And will it not also, in view of 
the fact that the number of these bonds is limited, place an 



THE ALDRTCH BILL 343 

additional value upon them which they do not possess in 
themselves? In other words, will it not create a bond value 
for men who own or control these bonds that they do not 
at present have? 

Mr. Dawes. The question is as to what you mean by 
"tying-up." I am discussing the matter of the relation of 
lawful money in connection with the statement that there 
will be a loan contraction because of the transfer of lawful 
money out of use by the banks of the United States. It 
does not make any difference how many more United 
States Government bonds the banks buy. They do not tie 
up lawful money in buying those bonds. They have $714,- 
000,000 of other bonds under the last statement, all of 
which they can sell for bills of exchange and for drafts in 
the same terms that every other kind of business is done — 
money in terms of checks and drafts and other bank-credit 
currency that has not any material relation to lawful 
money supply, which I am discussing at this time. They 
can change those bond securities at that time into the kind 
of bonds now required for national banks, and it might in- 
volve them in some loss of profits in that way. That is a 
question which relates to the finances of the individual 
banks. The country as a whole is not concerned so much 
as to whether the banks make a profit or make a loss in 
complying with the provisions of this bill, unless, in doing 
that, the banks have to interfere with the supply of lawful 
money in the banks which is a basis for loans, and the un- 
reasonable diminution of which may cause a contraction 
of loans. 

In connection with some argument which we had out in 
Chicago, this statement was made by Mr. Roberts: "You 
say that the banks may carry $134,999,880 in bonds. How 
are you going to buy those bonds with an excess in lawful 
money of only $53,000,000?" 



344 ESSAYS AND SPEECHES 

The answer to that is that the matter of lawful money 
has nothing to do with such transactions as are mentioned 
by Mr. Prince and by Mr. Roberts. That involves the sale 
of one kind of securities and the investment in another 
kind of securities. The banks of the United States have, 
in the one item of bonds and securities, $714,000,000, out 
of which they would get these other bonds without either 
decreasing their reserves with the central reserve cities or 
contracting any portion of their $4,444,353,647 worth of 
loans. 

When we get down to discussing what will be the effect 
upon general business of a compliance on the part of the 
banks of the United States with this bond provision, we 
are getting down to very small figures, from which very 
little result could flow one way or the other so far as the in- 
terests of the public are concerned. To get $135,000,000 of 
municipal bonds, to get the difference between the $600,- 
000,000 of bonds which they have now to secure currency 
and the additional amount which Mr. Prince refers to, — 
suppose it amounted to $200,000,000 of government bonds, 

— of course it would cause an increase in the price of gov- 
ernment bonds, which might involve the banks in some 
loss in that connection, but they would not be compelled 
to encroach upon their lawful money supply to do that, ex- 
cept in a very small degree, if at all. These transactions in 
bonds by banks are not done in lawful money. We all know 
that. They are done in the same kind of currency that 
ninety per cent of all of the business of the United States 
is done — by a transfer of banking credits. And this ques- 
tion cannot be befogged by the injection into this discus- 
sion of questions relating to the purchase or the sale of 
bonds. That is a question which relates to the banks them- 
selves. The banks themselves might make that argument 

— that it will be too costly for them: that some of them 



THE ALDRICH BILL 345 

may not want to avail themselves of this provision. But 
my point is that there is a surplus at this time of lawful 
money in the banks of the United States to such an extent 
that, because of the purchase of bonds (either government 
or municipal bonds) by these banks to the extent provided 
for by this bill, it will not be necessary to encroach mate- 
rially upon that surplus or reserve in lawful money. It 
would not begin to consume the surplus over the Aldrich 
Bill requirements at this time. I am speaking now of law- 
ful money. 

Mr. Weeks. I do not want to interrupt you or break the 
thread of your argument; but let me suggest that that con- 
dition did not obtain a year ago. 

Mr. Dawes. I am going to answer that. Mr. Prince re- 
ferred to that matter. What is the weak point of our whole 
banking system? It is this system by which, to so great an 
extent, the country banks of the United States are allowed 
to do business on the basis of a debt from another bank, 
called a deposit with a reserve agent. That weakness in 
our banking system has been the subject of discussion off 
and on for the last thirty years in the Treasury Depart- 
ment of the United States. John Jay Knox, in 1873, called 
attention to it. Attention has been called to it by other 
Secretaries of the Treasury, including Mr. Cortelyou. I 
called attention to it in my Report to Congress for 1899. 
Mr. Forgan calls attention to it in an address which I have 
here, in which he quotes from my Report to Congress — that 
this reserve law in the United States, which enables a coun- 
try bank to run with a reserve of $6000 cash (two fifths of 
fifteen per cent) on every $100,000 deposit liabilities, results 
in too great a disproportion between the aggregate deposit 
liabilities of the banks and the aggregate cash in which 
those aggregate deposits are liable to be called for. There 
is an inducement given each summer by the redundancy of 



346 ESSAYS AND SPEECHES 

money in the country banks for them to send it to their 
central reserve agencies; and, as Mr. Prince has said, in the 
summer there is a great redundancy of money. And where 
does it go? It largely goes to the central reserve cities — 
first from the country bank to the reserve city; then from 
the reserve city to the central reserve cities, largely to the 
city of New York; and the banks of the city of New York, 
of necessity, in order to get the money with which to pay 
the two per cent interest on their deposits, loan it on call 
in Wall Street. I should estimate that even to-day there is 
in the neighborhood of $400,000,000 of the money of na- 
tional banks and country banks loaned upon Wall Street. 

Mr. Gillespie. Is all of that reserve requirement — that 
$400,000,000? 

Mr. Dawes. Oh, no; I am just speaking of the amount 
of the loans. 

The Chairman. You mean those loans, too, which are in 
excess of the reserve? 

Mr. Dawes. Yes. I am not speaking, Mr. Fowler, simply 
of loans made by the city banks. I am speaking also of 
loans which are made through agents. That has no par- 
ticular relation — 

Mr. Waldo. What Mr. Gillespie has asked you, and what 
I want to know, is whether you think that $400,000,000 is 
the accumulation of reserves from the country banks? 

Mr. Dawes. No. 

Mr. Prince. He says not. 

Mr. Dawes. No. 

Mr. Gillespie. It is just the country banks gambling in 
Wall Street? 

Mr. Dawes. No; it is not that. I will come to that a little 
bit later. 

The Chairman. Mr. Dawes, I do not want to interrupt 
you; but I want you to make the point plain that the banks 



THE ALDRICH BILL 347 

are doing that and sending money there to be loaned 
largely without any reference to reserves at all. I wish you 
would explain that. 

Mr. Dawes. Yes, they are doing that; and my estimate 
of the amount of money which is sent there by the country- 
banks of the United States (that is, the banks in the inte- 
rior cities) at this time is about $95,000,000. About five 
months ago it was as high as $150,000,000. I have made 
some investigation into that matter; and, apart from the 
loans which are made on the "Street," there are probably 
brokers' loans made for the banks of the United States to 
the extent of approximately $100,000,000 at this time. 

Mr. Crawford. Do you regard that as an evil? 

Mr. Dawes. I most certainly do, as I am going to try to 
prove. 

Mr. Crawford. What remedy have you? 

Mr. Dawes. Just exactly the remedy provided by the 
Aldrich Bill — to keep more of that cash money where the 
deposit liabilities for which it is pledged exist. 

Mr. Gillespie. If this money is not needed for reserves 
in the country banks — if they are not only making their 
reserve deposits, but are sending their depositors' money 
in greater amounts to invest in stocks and bonds in the 
stock and bond market of New York — ■ 

Mr. Dawes. But it is needed in their reserve account. 
That is what I am trying to show. 

Mr. Gillespie. But it is in excess of their reserves, is it 
not? 

Mr. Dawes. The point is that the Aldrich Bill increases 
the amount of the reserve which the country banks have to 
hold; and I maintain that the increase of the amount is a 
necessary increase and that the permission given under the 
law to send to their reserve agents so large a proportion of 
their reserve results in the undue accumulation of money in 



348 ESSAYS AND SPEECHES 

New York and in unduly low interest rates upon that form 
of loans which are readily convertible. 

Mr. Weeks. You do not want to let that suggestion of 
Mr. Gillespie's go in that form. The country banks do not 
invest in bonds and stocks; they loan to others, with bonds 
and stocks as collateral. 

Mr. Dawes. Certainly. 

Mr. Gillespie. Oh, yes; it is a case of "tweedledum and 
tweedledee." 

Mr. Weeks. Oh, no; it is not even "tweedle." 

Mr. Dawes. Now, as to that evil : The permission given 
under the law to deposit so large a proportion of their re- 
serves with the reserve cities and central reserve cities re- 
sults, in the summer time (to which Mr. Prince refers) in 
an undue accumulation at New York. The New York 
banks know that they will probably have to ship currency 
in the fall, as against the deposits which are withdrawn by 
their country banks, so they loan that money on Wall 
Street, and those loans on Wall Street are paid. There was 
no money lost on the Wall Street loans in the panic of 1893, 
I am told by the Comptroller's Office. There was no money 
lost, to my knowledge, on brokers' loans in the panic of 
1907. As a rule, those loans are promptly met when due. A 
personal relation does not subsist between the borrower 
and the lender. The business is done through brokers. It 
is done on a large margin. It is done upon those securities 
that are largely dealt in upon the exchanges, and those 
notes are quick cash. And this provision of the reserve law 
which allows so much of the country banking reserves to 
be held in the shape of a debt from another bank is what 
causes the undue collection of money in New York in the 
summer time, when there is a redundancy, and encourages 
speculation in Wall Street and ultimately produces the con- 
gested condition in Wall Street which, as in the summer 



THE ALDRICH BILL 349 

of 1899, results in 40, 80, and 100 per cent money and in 
frightening the whole country and in the impairing of the 
confidence of the whole country because of that condition. 
The efforts of the New York banks in the fall to contract 
their loans to meet the demands from the country banks 
for this money, which, in order to get two per cent interest, 
they have deposited there in New York, is what brings us 
to these emergencies. And in 1907, in October, that move- 
ment precipitated the great panic that the country ex- 
perienced. This evil is an admitted one. Mr. Forgan's 
remedy for it — he admits the evil — is branch-banking. 
Let me read it : — 

. In the last Annual Report of Mr. Dawes, as Comptroller of the 
Currency, he called the attention of Congress to this subject. He 
pointed out the danger of our system of permitting so large a por- 
tion of the legal reserves of one bank to be represented by deposits 
in another. Mr. Dawes was entirely right in his diagnosis. 

This comes from James B. Forgan, one of the foremost 
opponents of the Aldrich Bill, which strengthens these re- 
serves. 

It is a danger which confronts us whenever public confidence 
weakens. Whenever individual banks, through fear, withdraw 
their funds from their reserve agents and fortify themselves by 
increasing their cash reserves in their own vaults, then enforced 
liquidation takes place at the financial centers, where weekly 
reports of the shrinkage are published for the further terrifying 
of the already alarmed public. 

Then he goes on — 

Mr. Waldo. Mr. Dawes, if that were the only thing in 
the Aldrich Bill, there would not be very much objection 
to it, would there? 

Mr. Dawes. That is apparently the chief objection of 
the bankers of the United States. 

Mr. Waldo. I do not think so; I have not heard of it. My 



350 ESSAYS AND SPEECHES 

understanding is that the whole trouble arose from the fact 
that the law originally allowed this deposit of reserves for 
the purpose of redemption; that subsequently the law was 
changed, making the sole redemption point here in Wash- 
ington, and that provision was not taken out, as it ought 
to have been. That is all there is in it. There is nobody 
that knows anything about banking that does not believe 
that the reserves ought to be kept in the bank, where they 
belong. So I think there is nothing in that. 

Mr. Dawes. The resolutions of these clearing-house com- 
mittees point out, as they indicate, a great danger in this 
reserve feature of the bill in the strengthening of the re- 
serves of the country national banks and maintaining this 
strengthening of the reserves (and it is very small) in lawful 
money. In the matter of the country banks, it means that 
they would have to carry only $8000 in currency on every 
$100,000 of deposit liability, instead of $6000; but that is 
something. 

Mr. Waldo. The actual provision of the law is fifteen per 
cent, is it not? 

Mr. Dawes. Yes; but I am talking about the amount 
which they can carry in reserve cities. They are allowed 
under the present law to carry three fifths of it in reserve 
cities, and only two fifths of it must be carried in lawful 
money in the banks. Two fifths of fifteen per cent is six per 
cent. The Aldrich Bill says that they must carry four fifths 
of their reserves in their vaults, but one third of the four 
fifths — that is, one third of twelve per cent, which is four 
per cent — can be in the shape of these municipal and pub- 
lic bonds. That leaves the actual cash lawful money re- 
quirement eight per cent — an increase of only $2000 on 
$100,000 deposits in the case of national banks. 

Mr. Waldo, You have no objection to that? 

Mr. Dawes. I want to, if I can — 



THE ALDRICH BILL 351 

Mr. Waldo. I do not think any one on this committee 
has any objection to that. If there is such a person, I have 
not heard from him. 

Mr. Pujo. I would like to have them keep the whole 
fifteen per cent there. 

Mr. Gillespie. But, as Mr. Waldo says, the fight has been 
made by the bankers here. They dwell on the provision of 
the Aldrich Bill changing the reserve. 

Mr. Dawes. That is the chief provision that they object 
to; and why? They want the use of that additional amount 
of money in their banking reserve cities. It is natural 
enough that they should. 

The Chairman. After you require them to hold it there, 
if you then authorize them to buy a bond that will bear 
four or five per cent interest, any country banker is going 
to convert his cash reserve (and the reserve is not anything 
unless it is cash) into these bonds. 

Mr. Dawes. Exactly. That is just exactly what I want 
to bring out. 

The Chairman. Just a moment. What have you accom- 
plished if you get him to put his money there, and then 
allow him to put it into a fixed investment? 

Mr. Dawes. I am just explaining that you have increased 
your cash reserve two per cent under the lawful money re- 
serve requirement of the Aldrich Bill. The banker has to 
carry $8000 cash instead of $6000. To the extent of that 
additional $2000 the foundation of all banking credits in 
the United States is stronger. Then the Aldrich Bill pro- 
vides that he can carry one third of that four fifths, which 
is four per cent, in bonds. Then it also provides that if 
there is an emergency and the banker has to have the cash 
money to pay his depositors on demand, he can go to the 
nearest subtreasury and get ninety per cent of the value of 
those bonds in these emergency notes. And if he wants to 



352 ESSAYS AND SPEECHES 

use those emergency notes as reserves the law provides that 
he can get that amount of the emergency notes in lawful 
money over the same counter from which he takes his 
emergency currency. 

The Chairman. Just a moment. 

Mr. Dawes. In other words, he can reinforce his lawful 
money reserves. 

The Chairman. Here is a reserve of $4000 on $100,000; 
is there not? 

Mr. Dawes. In bonds; yes. 

The Chairman. In bonds? 

Mr. Dawes. Yes. 

The Chairman. Very well. They are reserves when they 
are in the form of bonds; are they not? 

Mr. Dawes. Yes. 

The Chairman. Very well. Now, when the banker comes 
to Washington — 

Mr. Dawes. He will go to the nearest subtreasury. 

The Chairman. Let us say the subtreasury, then — when 
he comes there and deposits his bonds, he has depleted his 
reserves $4000 when he takes the notes back in his hands; 
has he not? 

Mr. Dawes. Exactly. 

The Chairman. Very well. Then, what is he going to do 
to build up the reserve that he has depleted? 

Mr. Dawes. Under the provisions of this bill he can take 
the emergency notes back, and the United States, under 
its provisions, has to give him lawful money of the United 
States for them. Have you not read the bill? That is what 
it says. 

Mr. Waldo. Then will not the United States present the 
emergency notes to him immediately and take the lawful 
money away from him? That is the next thing that will 
happen in that case; is it not? 



THE ALDRICH BILL 353 

Mr. Dawes. If that is the case, introduce a bill to correct 
it, if you please. But the point is, and it has been made by 
the bankers generally — 

The Chairman. Practically this is what he would have 
to do: If he takes this $4000 in these bonds — 

Mr. Dawes. Four per cent, you mean. 

The Chairman. Yes; this four per cent — $4000 to $100,- 
000 is the way I express it, because we understand those 
things better. 

Mr. Dawes. Yes. 

The Chairman. He takes them down to Washington; 
and those are his bonds? 

Mr. Dawes. Yes. 

The Chairman. He deposits them, and he gets non-re- 
serve money. Therefore he has to go and call $4000 of 
loans in his town in order to build up his reserve? 

Mr. Dawes. Why, not at all. 

The Chairman. Absolutely so. In other words, the com- 
merce of the United States would have to liquidate five 
hundred millions of its loans in order to build up the re- 
serve. 

Mr. Dawes. Mr. Fowler, you are making exactly the 
same mistake there that most of these bankers have made. 
That $4000 in bonds which he has in his reserve he can 
take to the subtreasury and get for it ninety per cent 
($3600) of money in the form of emergency notes. The 
bill provides that the Government of the United States, on 
demand, will exchange those emergency notes for lawful 
money of the United States, which goes into the reserve, 
and which, so far from necessitating a contraction of the 
loans, is an addition to that extent to the cash supply of 
the United States. 

The Chairman. Will you tell me where the Government 
is going to get that five hundred millions when there is a 



354 ESSAYS AND SPEECHES 

shortage of revenue? Tell the committee where the Gov- 
ernment is going to get that five hundred millions. 

Mr. Dawes. That is the first time that matter has been 
mentioned. That was not your former argument. This is 
step by step. 

The Chairman. Oh, yes; it is. It is all a piece of work. 
Please tell this committee where you will get your five 
hundred millions. 

Mr. Dawes. Let me make this point, too, right in that 
connection: That the question of whether those emer- 
gency notes are legal reserve or are not legal reserve will 
never concern the banker for one minute in the emergency 
which he confronts. 

The Chairman. In other words, you are going to allow 
the national banks to hold their own notes as reserves? 

Mr. Dawes. Mr. Fowler, I am going to take up that 
question of reserve notes. 

The Chairman. I should like to have you tell this com- 
mittee where the United States Government is going to get 
that five hundred millions which it will have to get. 

Mr. Dawes. You are in favor of the Williams Bill? 

The Chairman. Just a minute; I should like to have you 
tell this committee where the Government is going to get 
that five hundred millions? 

Mr. Pujo. Revise your tariff, increase your revenue, and 
put a Democrat in office. 

Mr. Dawes. If the Government of the United States 
agrees to redeem these emergency notes on demand in law- 
ful money, the great probability is that the demand for 
redemption will be such that, under the ordinary rule of 
banking (which is that the actual demand will only be a 
fraction of the possible demand), the United States Gov- 
ernment can meet that demand without any special legis- 
lation upon the subject. 



THE ALDRICH BILL 355 

The Chairman. Five hundred millions in the course of 
two or three months? 

Mr. Dawes. Five hundred millions in the course of two 
or three months? Five hundred millions would never be 
presented for redemption in the course of two or three 
months. This Government of the United States ran here 
for years without a full gold reserve behind all its notes, and 
it has not got it now. Suppose the $346,000,000 of green- 
backs should be presented all at once, what would the 
Government of the United States pay them with? 

The Chairman. What did they do in 1895? 

Mr. Dawes. They issued bonds and increased their gold 
reserve. 

The Chairman. And that is what you would have to do 
in this case. 

Mr. Dawes. But you do not know what the amount of 
the presentation is going to be. I tell you that these notes 
will not be presented to get the lawful money, because the 
people know that they can get lawful money if they do 
present them, just as your greenback notes are not pre- 
sented for redemption in gold at this time. There will be 
the element of exchangeability. 

The Chairman. Suppose you put a burden of five hun- 
dred millions more on this country, how long do you sup- 
pose it will be before some one will think that the Govern- 
ment cannot pay lawful money and will start this endless 
chain again? 

Mr. Dawes. My answer to that is that the credit of the 
Government of the United States, even if the possible ad- 
ditional demand of $500,000,000 is made upon it, will be 
equal to the protection of the credit of its obligations. 

The Chairman. In what way? It has no liquid assets — 
not a dollar. In what way? 

Mr. Dawes. If necessary, by the sale of bonds. 



356 ESSAYS AND SPEECHES 

The Chairman. Ah! That is it. That is exactly what I 
wanted you to say. 

Mr. Dawes. If necessary, by the increase of revenue. 

The Chairman. That is the whole thing. That ends it all. 

Mr. Dawes. That ends it all, Mr. Fowler, in your par- 
ticular mind. 

The Chairman. No, no; in the public mind. 

Mr. Dawes. Let me analyze this; let us finish up these 
things one at a time. Here the chairman of the Committee 
on Banking and Currency maintains, if the banks take out 
$500,000,000 of this currency, which is subject to a tax of 
six per cent if it is not redeemed in four months and a tax 
of nine per cent for the time that it runs after that, that 
within the time the banks will be willing to take out that 
currency there will be something like a possible demand 
upon the Government of the United States for $500,000,- 
000 ! No more nonsensical proposition than that was ever 
uttered. These notes will probably only be used once in 
fourteen or fifteen years. These are emergency notes, sub- 
ject to heavy taxation. And the idea that the solvency of 
the United States Treasury is in any way involved by the 
possibility of the changing of those emergency notes into 
lawful money of the United States is nonsensical. 

I say, further, that this question of reserves, and the re- 
lation of reserves to credits, is largely theoretical. If the 
people know that these emergency notes are redeemable, 
and redeemable on their face by the United States Govern- 
ment in lawful money, and can be changed into lawful 
money on demand, they are going to circulate just as the 
national bank-notes do now. The whole theory of our cur- 
rency system in that respect is that the actual demand for 
redemption is only a fraction of the possible demand. And 
in the consideration of a bill which is confessedly for the 
purpose of emergency use, to say that the Government of 



THE ALDRICH BILL 357 

the United States is going to be embarrassed by demands 
for lawful money I say is unfounded, in the first place, be- 
cause the bank will pay those notes out over its counters to 
its frightened depositors. That is the purpose of the bill. 
The bank which gets out this emergency circulation will 
not even wait to change the notes into lawful money at 
the Treasury Department. The Comptroller of Currency 
might write them in thirty days, saying, "Your reserve is 
short." Is the banker thinking about his reserves? He is 
thinking about keeping his bank open. 

As a matter of fact, Mr. Fowler objects to the fact that 
national bank-notes enter so largely into the reserves of the 
national banks. Nobody pays any attention in these days 
to whether a note is a national bank-note or a government 
note. There will, in my judgment, be no demand of any 
considerable amount at any time for the redemption of 
these notes in lawful money, although technically they 
could be changed into lawful reserve under that provision 
of the bill. 

Mr. Waldo. Let us take a concrete case, if you will. Sup- 
pose a bank has a capital of $100,000 and a surplus of 
$100,000, and it takes out the ordinary bond notes and 
starts in. Of course when it starts it has $200,000, either 
in lawful reserves or something that must be as good as law- 
ful reserves. It takes out $100,000 in the ordinary notes. 
That takes $100,000 of its reserves to start with, does it 
not? That is the first thing it has to part with before it can 
get its notes, because it has to buy its bonds. Suppose that 
bank wants to take out what this bill provides, the amount 
of its capital and surplus in addition — that will take all 
the rest of the reserve. How many loans could it make 
when it got through with that operation? 

Mr. Dawes. I will have to ask the stenographer to read 
that question to me slowly in order to get its import. 



358 ESSAYS AND SPEECHES 

(The stenographer read as follows:) 

Let us take a concrete case, if you will. Suppose a bank 
has a capital of $100,000 and a surplus of $100,000 — 

Mr. Dawes. What has that to do with reserves? Re- 
serves are figured on deposits; not on capital and surplus. 

Mr. Waldo. No; they have that much reserve money 
when they start, before they do any business at all. 

Mr. Dawes. But they have that much reserve money on 
what — deposits? 

Mr. Waldo. No; I mean they have lawful money assets 
that are reserve money when they start the bank to the 
amount of $200,000. 

Mr. Dawes. Yes. You are talking now about a new bank 
starting — not one already in existence? 

Mr. Waldo. Yes; a new bank starting. Suppose they 
start under this Aldrich Bill — the first thing they may 
take out $100,000 of the ordinary United States bond 
notes. 

Mr. Dawes. My answer to that would be simply this, as 
a practical banker: That at the time these emergency 
notes were desired, in time of panic, no new banks would be 
starting. What is the use of going into these theoretical 
questions? That has been the trouble with this whole sub- 
ject. What the United States wants at this time is some re- 
lief from an intolerable situation; and this bill is the first 
intelligent effort upon which it seems possible to unite. 

Mr. Waldo. Let me ask you another question. 

Mr. Dawes. I would like, if I can, to finish the main 
thread of my argument; and then I will stand up for 
catechism as best I can. 

Mr. Waldo. Very well. 

Mr. Weeks. Have you finished the part of your argument 
which applies to the location of reserves? 

Mr. Dawes. No; I have not at all. 



THE ALDRICH BILL 359 

Mr. Weeks. I want to ask you a question about that 
when you get through. 

Mr. Dawes. All right, Mr. Weeks; wait until I get 
through with that point. 

I was going to say that Mr. Forgan, one of the opponents 
of the Aldrich Bill, calls attention to this weakness in the 
matter of our reserves. Comptroller Ridgely, in his last 
Report, calls attention to it in a very emphatic manner. 
Mr. Forgan's remedy was that of branch banks, such as 
they have in Canada. Mr. Ridgely's remedy is that of a 
central bank. Let us see what he says about this condition 
(it is a very good statement of it) which is caused by the 
permission given to the country banks of the United States 
to keep so large a proportion of their reserves which are 
pledged to meet their local deposits in city banks. He 
says: — 

The chief weakness of our present national banking system is 
the provision in regard to reserve deposits, which piles reserve on 
reserve, in reserve cities and central reserve cities, without re- 
quiring a sufficient amount of actual cash reserve on hand. As we 
have seen in the present crisis, when a real emergency arises these 
reserves are not reserves at all, because they may in a day become 
unavailable. 

Then he goes on to say, in commenting upon the enor- 
mous extension of banking credits, and the enormous dis- 
proportion between the actual cash in which deposits are 
redeemable and the amount of credits which are built 
above them by this system of duplicating credits : — 

Is it any wonder, then, that the demand in the fall for about 
$200,000,000 in currency for crop-moving always makes a disturb- 
ance, and that when this demand was accompanied by withdrawal 
of deposits and a curtailment of credits, caused by uneasiness and 
distrust, that the banks were forced in self-defense to partially 
suspend payments, adopt clearing-house certificates, and various 
other expedients to furnish currency to meet such an emergency? 



360 ESSAYS AND SPEECHES 

I will say, with reference to that, that adopting the 
clearing-house certificates was in my judgment largely an 
expedient to avoid furnishing currency. It was to enable 
the city banks to protect themselves against the demands 
for the shipment of currency by means of drafts made 
through other banks in the same city, which would have to 
be met in currency at the clearing-house. 

The surprising thing is not that there has been such a disturb- 
ance of credit and business, but that the situation has been met as 
well as it has. It speaks volumes for the credit of the banks that 
they have done as well as they have, and shows the confidence 
of the people in their ultimate solvency and strength. It is the 
greatest possible evidence of the wisdom, patience, forbearance, 
and sound, conservative sense of our business men. 

It does not, however, speak well for our political wisdom that 
this condition has been allowed to stand unchanged without any 
attempt to improve our laws. This situation is nothing new, but 
has been known to all students of our banking and currency sys- 
tem and written and talked about for many years. It has pro- 
duced disturbance and stringency every autumn for forty years, 
and panic after panic. 

It is directly and immediately due to this that the crisis of 
October, 1907, assumed the phase of a bank panic and spread all 
over the country, instead of being confined to the comparatively 
few people and concerns who were first involved, and it undoubt- 
edly added to and spread the business reaction in all directions. 

Mr. Ridgely's remedy for that is the central bank. Mr. 
Forgan's remedy for it is branch banks. I may be very un- 
scientific and uneconomic, but my remedy for it is to keep 
a larger cash reserve on hand and not let it go out. I think 
that beyond any question it is shown that the banks of the 
United States (which now have on hand, as I have shown, 
a total lawful money surplus over the requirements of the 
Aldrich Bill of something like $98,000,000) can comply 
with the requirements of that bill without contraction of 
the national bank loans; and that is the argument which is 



THE ALDRICH BILL 361 

made which appeals to the country at large and which has 
alarmed your commercial associations. It does not involve 
the contraction of loans to put the national banking system 
of the United States in this stronger shape, with a firmer 
cash foundation under the credits, and this is the only 
time when it can be done without disturbance of busi- 
ness. If you wait until money goes into business, until 
loans expand again, until there is not this redundancy of 
money to which Mr. Prince referred, you bid good-bye 
to any opportunity to increase your cash reserves in the 
future. 

Mr. Forgan well criticized me in connection with my 
former recommendation to Congress for the increase of re- 
serves, on the ground that it would have caused a panic in 
this country if that recommendation had been complied 
with at that time. It would have done so, because that 
money had gone into the reserve cities. It had gone into 
business. It had gone from the place where it should have 
remained, in the vaults of the bank where the deposits were 
for which it was liable, and into general business. To call 
it back meant the kind of reduction in loans that those who 
were opposing the Aldrich Bill have erroneously claimed 
would result at this time. My only excuse is, in that con- 
nection, that I did not consider that there was any immedi- 
ate prospect of the passage of that bill into law at that time 
as a result of the recommendation of a Comptroller of the 
Currency. But it was my idea of registering my ideas in 
connection with this fundamental weakness of the national 
banking system of the United States. Perhaps it could be 
cured under a branch-bank system. Perhaps it could be 
cured under a central-bank system. But it can be par- 
tially cured at this time without embarrassment to exist- 
ing business of the United States by the passage of that 
provision of the Aldrich Bill. 



362 ESSAYS AND SPEECHES 

Mr. Gillespie. What is the motive for a country bank to 
withdraw these deposits if they can be counted as a part of 
their reserve and if they had them at home they could not 
lend them out? What is the motive? If that is all the 
money they have on deposit in reserve and central reserve 
cities — I believe they have a great deal more that is in- 
vested in loans up there — but if that is all of the money 
they have (just the portion of their reserve that is counted 
as reserve), if they had it in their own vaults, they could 
not use a cent of it without violating the law. 

Mr. Dawes. No; and that is just the point. I am not 
making this argument for the purpose of increasing the 
profits of the banks. They will put this money, which they 
now have in their reserves, in their vaults, into reserve cit- 
ies, if the Aldrich Bill is not passed, after a time, after the 
effects of this lesson have worn off. If the Aldrich Bill is 
passed, they will keep $8000 on every $100,000 of deposits 
in cash in their vaults, on which they will not get any in- 
terest. The banks of the United States at this time are 
running with stronger reserves, because they are just over 
this panic; and as a matter of business precaution they are 
doing more at this time than the Aldrich Bill requires them 
to do as a matter of public interest. But if the Aldrich Bill 
is not passed, the country banks as a whole will hold, or are 
liable to hold, about six per cent of their deposits — $6000 
on every $100,000 — in cash. They will put the balance of 
their fifteen per cent reserves on deposit with the central 
reserve cities or the reserve cities, because in that way they 
get two per cent interest on it; and if they kept the full fif- 
teen per cent in cash in the vaults, they would lose the in- 
terest. Under the Aldrich Bill requirements the banks of 
the country in non-reserve cities will lose the interest on 
$2000 out of every $100,000 of deposits. They will lose two 
per cent on $2000, which is $40 a year. 



THE ALDRICH BILL 363 

The Chairman, But if they got four per cent on their 
bonds — 

Mr. Dawes. If they got four per cent on their bonds, 
they would keep that reserve in bonds, and that is just the 
point I wish to make at this time — that the Aldrich Bill is 
so drawn that in all probability the banks of the United 
States will have on hand $134,000,000 of bonds which they 
can take to the subtreasury for the issuance of emergency 
currency, and thereby increase the available currency of 
this country in times of panic and in times of emergency to 
the extent of $121,499,892. 

I have made here an estimate of the additional strength 
over present requirements in lawful money and in possible 
emergency notes which will be the result of the passage of 
the Aldrich Bill. That is in answer to the objection which 
is made that the banks will not take this circulation out. 
Some bankers are making the objection that they will not 
take out this emergency circulation because it costs so 
much. If they do not take it out because it costs so much, 
it will be because they do not need it so badly. But this is 
an estimate of the strength with which it is possible for the 
banks to be fortified in case the Aldrich Bill is passed. Re- 
member, in considering these figures, that this does not 
represent an increase in the amount of lawful money which 
they have on hand now; they have very much more than 
this on hand; but it is the amount of that excess which will 
be impounded under the Aldrich Bill and kept as an addi- 
tional foundation to protect the superstructure of banking 
credits above it. Contrast, if you please, the smallness of 
these figures with the magnitude of the results which have 
been predicted as a result of the passage of this bill. 

The country banks will keep on hand in lawful money 
an additional $49,209,248. The reserve city banks will 
keep on hand in lawful money an additional amount of 



364 ESSAYS AND SPEECHES 

$18,298,155. Those two amounts will be all the additional 
requirements of the Aldrich Bill in lawful money for the 
banks outside of the central reserve cities. But they will 
have $134,999,880 in these bonds, for the reason (and that 
answers, I think in part, a suggestion that has been made 
here) that they will get four per cent interest on those 
bonds which are in their reserve instead of the two per cent 
which they would get if they had the money on deposit 
with the reserve agent. Taking ninety per cent, estimating 
the value of those bonds at par, there is a possible emer- 
gency currency which the banks of the United States can 
take out of $121,499,892. The latter sum represents money 
not now in existence, which can come out in times of emer- 
gency to help liquidate credits, which can go out to lessen 
the effects of a panic such as we have passed through in 
1907. 

If anybody does not think that that amounts to some- 
thing, let him compare that amount with the money which 
the Treasury of the United States deposited with the banks 
of the country to relieve them in this crisis. It was a very 
good thing for this country that in this last crisis it had the 
Independent Treasury system, which has been the subject 
of attack by so many of those who want radical changes in 
our law. We might have been in the same position in which 
the Treasury of the United States was in 1837, when, 
with the largest cash balance that they had ever had in 
their history up to that time, there was only a little over 
$1,000,000 of it available, the rest being tied up in em- 
barrassed banks. In the panic of 1857, after the passage 
of the Independent Treasury Act (which was forced upon 
the people as a necessity), the Government, as it did in 
this panic, not having all its money tied up in the banks, 
fed it into the banks, to the great relief of the business 
situation. 



THE ALDRICH BILL 365 

That emergency currency of $121,499,892 will be almost 
certain to be added to the circulation of this country in the 
next panic if the Aldrich Bill is passed. Adding that sum 
to the amount which is impounded and kept where it is — 
the two amounts I have given before — it makes a total 
additional strength under the Aldrich Bill which is practi- 
cally certain in times of panic of $189,007,295. And the 
banks can still take out additional emergency circulation 
to the extent of the difference between $121,499,892 and 
$500,000,000 — to wit, $378,500,108. 

If you are afraid you are going to endanger your gold, 
if you are afraid of the possibility of the embarrassment of 
the United States Government by the demands of the 
holders of these emergency notes (although, as a rule, the 
people who are after money in those times are not think- 
ing very much about its redemption, if the promise of the 
Government of the United States to pay is on them, just at 
that particular time, though they may later), then reduce 
the amount of the notes which you authorize under this 
bill. I have not made the careful examination which ought 
to be made on all these things of the ability of the Treas- 
ury to make this exchange — 

Mr. Hill. That is a very serious question. 

Mr. Dawes. And nobody else, as far as I can see, has 
made any examination on that point. As yet no objection 
has been made that the United States Government will 
not be able to keep its promise to redeem these emergency 
notes in lawful money if the demand is all made. There 
would be an embarrassment if it was all made. But the 
point I make is that it is a very great stretching of the 
probable to contend that there would be any demand 
which would be embarrassing upon the United States 
Treasury for the exchange of the emergency notes into 
currency. In the first place, those notes are taxed, so that 



366 ESSAYS AND SPEECHES 

they will probably be back in four months, redeemed by 
the banks, which will themselves furnish the lawful money 
to take them up. 

There is not any question that these notes will be tem- 
porary, and of the fact that a request for the changing of 
those notes into lawful money notes to any large extent 
would only be made by a bank which feared action on the 
part of the Comptroller because its reserves were short. 
In a time of panic, in a time of emergency, the bank itself 
is not going to take the trouble to go and make demand on 
the United States Treasury for the exchange of its emer- 
gency notes into lawful money, because of a provision in 
the National Banking Law under which, in a perfunctory 
manner, the Comptroller's Office generally calls attention 
to the shortage of the reserve thirty days after it has been 
made good. The banks are going to take out this money 
to pay over their counters into circulation. Then the 
money is taxed so that it will be forced back in four 
months. The lawful money will be on deposit in the 
Treasury of the United States to enable it to take up 
these notes long before any large presentation is made. 
There is nothing in the point when it comes down to a 
practical consideration. 

Mr. Prince. Right here let me ask where you find any 
provision in the Aldrich Bill requiring the banks to redeem 
this emergency currency in lawful money? 

Mr. Dawes. You do not need any provision requiring 
them to do so. 

Mr. Prince. I find a provision here that the Govern- 
ment of the United States obligates itself to do so. 

Mr. Dawes. Yes. 

Mr. Prince. I find no provision here that the bank of 
issue obligates itself to pay its "I O U" in lawful money. 
I think they would redeem in their bank-notes. 



THE ALDRICH BILL 367 

Mr. Dawes. I think, as I have said, that there are de- 
fects in this Aldrich Bill. One very great defect — 

Mr. Prince. Is not that a very serious defect — throw- 
ing the extreme burden upon the United States Treasury 
of maintaining its present money upon a gold basis, and 
then adding from five hundred millions to a billion more 
of inflation money, to be maintained upon a gold basis? 

Mr. Dawes. Yes; I was going to say that if the bill does 
not already do so, it should be amended so as to provide 
that the banks shall deposit the lawful money to take up 
these notes, so that the banks themselves will protect the 
Government in its obligation to take them up in lawful 
money. 

The Chairman. You know the bill does say "lawful 
money or bank-notes." 

Mr. Dawes. Yes; but then it provides also that the Gov- 
ernment of the United States shall hereafter redeem all 
bank-notes in lawful money. So that, after all, — 

Mr. Gillespie. It amends the law as to the redemption 
of national bank-notes? 

Mr. Dawes. Yes. 

Mr. Gillespie. They are only redeemed now in United 
States notes? 

Mr. Dawes. Yes. 

So much has been said in connection with the use of 
bank-notes as reserve that I wish to refer briefly to that 
matter. I want to say that in all my figures I have made 
no reference to about $34,000,000 of the bills of other 
banks, which would be in addition to this surplus in law- 
ful money of $98,568,567, which the banks of the United 
States would have over the requirements of the Aldrich 
Bill. I have read what Mr. Fowler has said in connection 
with the use of bank-notes as a reserve by state banks; and 
I read with a great deal of interest last night some cate- 



368 ESSAYS AND SPEECHES 

chism of Mr. White, which was indulged in here. It may 
be uneconomic, it may be unscientific, but I would like to 
have anybody show me where it is an injury for the state 
banks of the United States to use national bank-notes as a 
reserve. 

The Chairman. What would they use if they did not use 
them? 

Mr. Dawes. They might use lawful money of the United 
States. 

The Chairman. What would they use if they did not use 
the bank-notes? What would they use? 

Mr. Dawes. Bank-notes form, of our total circulation, 
six hundred and some odd million dollars out of a total of 
$2,700,000,000. There is plenty of other money. There is 
about $1,660,000,000 — is not that right, Mr. Fowler? [re- 
ferring to Mr. W. J. Fowler] — of money in circulation in 
the United States to-day not in banks. 

The Chairman. Let us get right down to an actual fact: 
What would a bank use for reserves if it did not have bank- 
notes? 

Mr. Dawes. A state bank? 

The Chairman. Yes; any bank? 

Mr. Dawes. It would use government money — lawful 
money. 

The Chairman. Very well. The lawful money is main- 
tained upon a gold basis by the Government, is it not? In 
other words, they would have gold, would they not? If 
they did not have bank-notes, they would have gold or its 
equivalent? 

Mr. Dawes. Theoretically. 

The Chairman. Therefore it is true, is it not, that every 
bank-note that a bank holds excludes just that much gold 
from its reserve? 

Mr. Dawes. Mr. Fowler — 



THE ALDRICH BILL 

The Chairman. Hold on; is not that right? 

Mr. Dawes. No; I do not agree with that conclusion at all. 

The Chairman. Just a moment; let us follow it out and 
see. If they did not have bank-notes, you say they would 
have what is equivalent to gold, because the Government 
maintains all its money on a gold basis. Therefore, if they 
did not have bank-notes, they would have gold. Is it not, 
therefore, evident that if you have five hundred millions of 
bank-notes in the reserves of this country, you have ex- 
cluded five hundred millions of gold? 

Mr. Dawes. Now, Mr. Fowler, just let me answer that, 
because I think that is a fair sample of your reasoning. 
You are a recognized leader in this country on this sub- 
ject, but let me give you my idea of that form of argu- 
ment; I do not, when I am running a state bank, sit down 
and figure out how my dealing in national bank-notes over 
the counter is going to affect my conduct of that business 
in regard to my loans. I handle the national bank-notes 
just as I would handle the government money of the 
United States. It is exchangeable, for all practical pur- 
poses into money of the United States. Nobody makes 
any question about it. Therefore, these "scientific" and 
"economic" arguments in connection with the use of 
bank-notes in state banks as reserve have never appealed 
to me as a practical man. 

The Chairman. Do you know that from 1837 to 1844, 
in England, bank-notes were used as reserve, and drove 
every dollar of gold out of Great Britain? 

Mr. Dawes. I have never made an examination of that 
particular question. 

The Chairman. That is a historic fact. They began in 
1834 to use bank-notes in Great Britain as reserves; and in 
1844 they were absolutely stripped of gold. 

Mr. Dawes. Let us analyze your objection in connection 



370 ESSAYS AND SPEECHES 

with the use of these national bank-notes in state bank re- 
serves. You do not object to the country national banks 
holding a part of their reserves on deposit in city banks, do 
you? No. None of the bankers do. In your bill you pro- 
vide for it. 

The Chairman. Do you mean of their balances? 

Mr. Dawes. Of their balances ? 

The Chairman. Certainly. 

Mr. Dawes. It is due them, you see. 

The Chairman. Certainly. 

Mr. Dawes. Now, what is a bank-note? A bank-note is 
a written promise to pay on demand made by that bank, 
secured by government bonds. You say that you are will- 
ing to let the state banks and the national banks bank on 
a book credit as a reserve in these reserve cities; and yet 
you say that they cannot bank on the written expression 
of that debt, backed by a government bond. 

Another thing : I do not think that you make proper es- 
timates in connection with this use of bank-notes for state 
reserves. You say: "Already $200,000,000, or nearly one 
quarter of all the reserves now held by the banking insti- 
tutions of the United States, are in bank-notes. That is, 
of the $12,000,000,000 deposits in the banks of the coun- 
try, between $2,500,000,000 and $3,000,000,000 are based 
upon bank-notes, mere promises to pay." That is all a re- 
serve balance is; only this is in writing, and secured. 
"And these mere promises to pay are again in turn based 
upon a debt of the Government, another mere promise to 
pay, which is not due for about twenty -five years, and then 
to be paid, if at all, out of taxes to be collected. How long 
will it be before all of our deposits will be based upon mere 
promises to pay, which in turn will be based on the debt 
of the Government, the debt of States, the debt of muni- 
cipalities, and the debt of railroads?" 



THE ALDRICH BILL 371 

I have taken occasion to look up the amount of these 
bank-notes that are held in the banks. I do not find any 
$200,000,000. I find in the Report of the Comptroller of 
the Currency for 1907, on page 49, that the amount of na- 
tional bank-notes which are held by the national banks 
(6429 banks) is $28,100,425, and all other banks (13,317 
in number) $12,724,605. That is a total of $40,825,030. I 
do not see where you get your $200,000,000. 

The Chairman. I know two banks not very far from 
Chicago that have, between them, $5,000,000; at least, I 
have been told that. I will tell you. I got those figures 
from the Comptroller's Office, from which I deducted the 
difference — 

Mr. Dawes. I got those figures from the Comptroller's 
Office myself. 

The Chairman. Oh, yes; that is their statement. 

Mr. Dawes. But I do not see how you reconcile a state- 
ment of that sort with these figures. 

The Chairman. But, Mr. Dawes, Mr. Ridgely told me 
just before I made my speech in the House that he did not 
believe that there were $150,000,000 of bank-notes in cir- 
culation, leaving $500,000,000 as a reserve. 

Mr. Dawes. The point I want to make is that it is all a 
question of belief; and if the statistics in the Comptroller's 
Office, made from the sworn reports of the banks of the 
United States, show that there are only $40,000,000 of these 
notes held in both state banks and national banks, how do 
you reconcile the statement (when the only possible source 
of complete information under oath is contained in those 
reports) that there are $200,000,000 of them held by the 
banks? 

Mr. Weeks. Do you, as a state banker, keep them sepa- 
rate? 

Mr. Dawes. As a state banker? 



372 ESSAYS AND SPEECHES 

Mr. Weeks. Yes. 

Mr. Dawes. Mr. Weeks, I am sorry to say that I really 
do not know. 

Mr. Weeks. Can you tell from your own report how 
many national bank-notes you have in your bank? 

Mr. Dawes. No; and that is just the point I am going to 
make about this whole thing — that it does not make any 
difference; and that this talk about the distinction to be 
made between national bank-notes — 

The Chairman. You say there that you have the sworn 
statement of the state banks that they only have $13,000,- 
000 of these notes, and yet you say that you do not know 
how many you have. 

Mr. Dawes. Yes; but how do you know that they hold 
$200,000,000? 

The Chairman. Do you think there is a single state bank 
that makes any difference whatever in them? You said 
you never did — that you treated them all alike. Do you 
not know, as a matter of fact, that all state banks use 
them indiscriminately, and never make any difference? 
Do you not know that? 

Mr. Dawes. I think there is a good deal in that. 

The Chairman. I will tell you how I came to that con- 
clusion. I did it by a process of deduction. I put 
it at $200,000,000, and Comptroller Ridgely puts it at 
$500,000,000. 

Mr. Dawes. I just want to show the uncertainty of 
these estimates which are made of the relation of national 
bank-notes to the reserve system of the country. As a 
matter of fact, you do not know; and the only statements 
we can get which are official on this subject show that 
there are only $40,000,000 kept in the reserves of the na- 
tional and state banks. If there are $200,000,000, what 
difference does it make? The point I make is this: that a 



THE ALDRICH BILL 373 

national bank-note is a written promise of a national bank 
to pay, secured by a government bond; and Mr. Fowler 
makes no objection to banking on a debt the evidence of 
which consists of an open account. 

The Chairman. How do you know? 

Mr. Dawes. What is it all but playing on words? And 
yet you use figures here which intimate that that has some 
relation to the matter of loan contractions. 

The Chairman. How do you know that I am not in per- 
fect agreement with you as to the wisdom of increasing the 
reserves in the country? How do you know? 

Mr. Dawes. I hope you are, Mr. Fowler; and I do want 
to say this — 

The Chairman. I have never said that I was not. 

Mr. Dawes {continuing). That this question as to 
whether these notes are reserve or not bears upon the 
question which I have brought out of the real lack of im- 
portance of the discussion as to whether those emergency 
notes are legal reserve under the law. And if that is so, 
does it not lessen (that is what I am getting around to) 
the importance of any point you might make about the 
embarrassment of the Government in regard to the re- 
demption of these notes in gold coin? 

The Chairman. You think they are legal reserve? 

Mr. Dawes. No; but the point will never come up prac- 
tically. They will not use them for making a demand for 
lawful money of the United States. 

The Chairman. Why not? 

Mr. Dawes. They will pay them out over their counters 
to the depositors who are drawing their money in time of 
panic. They will go into circulation; and before any of 
these notes are presented by the people who got them in 
these small amounts for redemption in lawful money the 
six per cent tax and the nine per cent tax after four months 



374 ESSAYS AND SPEECHES 

will drive the lawful money of the country into the Treas- 
ury of the United States to take them up. If the bill needs 
amending so as to make it obligatory upon the banks to 
put in lawful money to relieve the Government of that 
demand, it should be done. There is no practical point 
to your objection. 

The Chairman. Right there I want to call your atten- 
tion to this matter: You say that you would amend the 
Aldrich Bill, now, just think of it, so as to compel these 
banks to deposit lawful money. In other words, you would 
impound $500,000,000 of lawful money in the United States 
Treasury and leave $500,000,000 of pure credits afloat? 

Mr. Dawes. The impounding of that money is simply 
for the retirement of this emergency circulation. 

The Chairman. It is impounded, however, is it not? 

Mr. Dawes. No; it is not impounded. 

The Chairman. What do you do with it? 

Mr. Dawes. It is paid out, of course, to redeem the emer- 
gency notes, and goes to the public again. It will not stay 
in the Treasury. 

The Chairman. But who is going to send in the notes? 
It takes almost two years and a half to redeem our notes 
now. 

Mr. Dawes. That is very simple. The money is im- 
pounded there for the purpose of stopping interest on the 
emergency notes which are out in circulation; and the 
emergency notes are so printed that unquestionably a 
great many of them, payable on demand in lawful money 
of the United States, will be in circulation months after 
the banks have ceased to pay interest and have impounded 
the lawful money. But what difference does it make if the 
lawful money is there to take them up? There is no im- 
pounding; there is no contraction of the currency; there is 
no locking up of that money. 



THE ALDRICH BILL 375 

The Chairman. Is there not a contraction of the reserve 
to the extent of $500,000,000? 

Mr. Dawes. Not at all. I have just shown you that the 
possible contraction of the reserves is less than $67,000,000. 

The Chairman. Just a moment, now, at this point. If 
the banks issue $500,000,000 of this emergency currency, 
and then, to get rid of the tax under your proposed amend- 
ment, bring in $500,000,000 of lawful money, they do im- 
pound $500,000,000 of the reserves? 

Mr. Dawes. Surely; but what difference does it make? 
There is $500,000,000 of these notes that will have to stay 
out in circulation. 

The Chairman. But you do not propose to have them 
used as reserves, do you? 

Mr. Dawes. I say that the point in connection with the 
reserves is a point that is of no practical consequence. I 
say that national bank-notes ought to be used as reserves. 
I do not think it would make any difference. I have yet to 
find anybody, as I say, from the practical standpoint, that 
has been able to show me where there would be any prac- 
tical difference if national bank-notes, secured by govern- 
ment bonds, were used as reserves right now in other banks. 

The Chairman. Then I want to make your position clear 
— that you are in favor now of making national bank- 
notes a legal reserve? That is your position? 

Mr. Dawes. I would not object to it; yes, sir. 

The Chairman. And you are also in favor, on top of 
that, of making the proposed emergency notes lawful re- 
serve because they are the same thing? 

Mr. Dawes. If they are redeemable in lawful money of 
the United States, yes; there is no reason why they should 
not be made lawful reserve. 

The Chairman. That is all. 

Mr. Dawes. There is no objection whatever to it. 



376 ESSAYS AND SPEECHES 

The Chairman, Let me ask you a question here. 

Mr. Dawes. Just one minute. 

The Chairman. All Tight. 

Mr. Dawes. I think the Aldrich Bill should be amended 
in this regard : I think it was a great mistake that railroad 
bonds were taken out of the bill as a basis of security for 
these emergency notes. I think the Aldrich Bill should be 
so amended that in some way the banks in the central re- 
serve cities can use commercial paper as a basis of security 
of these notes on some proper margin of security. The six 
per cent tax which is paid on those notes will, in my judg- 
ment, furnish a fund which will be sufficient to take care 
of any redemptions which may be in default on account of 
any failure. And if in some way we can broaden the basis 
for the issue of these notes, every step in that direction is 
of the greatest importance. It was a mistake to have nar- 
rowed the basis of this security by eliminating those rail- 
road bonds. It was done for political reasons. But if they 
have experienced that difficulty in the Senate in connec- 
tion with railroad bonds of the kind that are provided for, 
it is a fair illustration of the difficulties of legislating in 
connection with a subject of this sort. 

The Aldrich Bill is not perfect. There are these flaws in 
the Aldrich Bill in connection with the matter of directors; 
for certainly it is just as important to keep good men on 
the boards of directors of banks as it is to drive bad men 
off. Under this provision of the Aldrich Bill, if it is passed 
as it is now, we shall have to get somebody besides business 
men to serve on the boards of banks. A great many people 
seem to think that if we can only put the banking business 
of the country into the hands of men who are not men of 
affairs, we shall in some way better it. As a matter of fact, 
we need the best business men on these boards of directors. 
I think — and when it comes to that we all have plans of 



THE ALDRICH BILL 377 

our own — that there ought to be some limitation on the 
right of directors of national banks to borrow from their 
own banks; and I have made a recommendation in connec- 
tion with that matter. But this broad, sweeping provision 
will have the effect of driving out of the banks, which are 
the custodians of the savings and the surplus of the people, 
the men who are best qualified to administer upon them as 
a trust. 

The general point that I make in connection with the 
Aldrich Bill is that its principles should at this time find 
legislative expression in some way. I say that the fact that 
it does in a sense perpetuate, if you please, the theory upon 
which our banking business has been built up this far is no 
reason why this country should be allowed to go without 
some legislation which will enable the banks, during the 
short time of the existence of a panic, to give relief to this 
country and not be compelled to subject it to the bank 
liquidation that there was in the last panic. A grave re- 
sponsibility rests upon those who have these plans of their 
own if they result in the country going without legislation 
of this sort — and they are able plans; they are well-con- 
ceived plans. Mr. Fowler has been one of the leaders in 
the education of the people in connection with these bank- 
ing problems, but how near has he got the people or even 
this committee to a consensus of opinion upon the advisa- 
bility of his plan? You may say that the Fowler plan is the 
leading plan of the various plans of the United States; but 
how nearly are the members of this committee (who have 
given thought to the subject, who certainly are more di- 
vested of prejudice than the ordinary collection of men who 
gather in public places, or in Congress, or in the Senate, we 
will say, to discuss this question) a unit on this particular 
bill? Take the American Bankers' Association Bill, pro- 
viding for taxed emergency circulation — what proportion 



378 ESSAYS AND SPEECHES 

of the people are united behind that bill? You have no 
chance to pass a radical bill at this time, as I think you 
nearly all agree — I do not know, of course, but I know it 
certainly seems to be the expression of those best informed 
in connection with the legislative situation at this time 
that there is no chance to pass a bill involving a radical 
departure from the system we have. Our people are con- 
servative. They have made experiment after experiment 
with the financial laws of the United States. This system 
is the result of a sad experience in such panics as the panic 
of 1837 and the panic of 1857. 

The Chairman. I beg your pardon. It is not founded on 
a single panic we ever had, nor a single mistake we ever 
made. I challenge you to name it. 

Mr. Dawes. The Independent Treasury system — 

The Chairman {interrupting). A curse for sixty years. 

Mr. Dawes. You challenge me to name it? I name it 
right now — the Independent Treasury system, which so 
many complain of at this time, was the direct result of the 
experience of the United States Treasury in the panic of 
1837 — and that Independent Treasury Act saved the 
condition of the United States Treasury and saved its 
credit in the panic of 1857. It was the direct result of the 
sad, bitter experience that this country had in connection 
with the deposits of the Government of the United States 
in the banks of the country, as you propose in your bill in 
connection with the national banks of the United States 
hereafter. I am not criticizing your bill, Mr. Fowler, be- 
cause I have not studied it sufficiently to know whether 
you have properly safeguarded that particular point or 
not; but I do say there is an instance where the act estab- 
lishing the Independent Treasury system, one of the most 
fundamental and important parts of our entire financial 
system, was passed as a result of the condition in which the 



THE ALDRICH BILL 379 

United States Treasury found itself after the panic of 1837, 
because it did not lock up — 

The Chairman. When was a sub treasury established? 

Mr. Dawes. In 1846. 

The Chairman. It was not the result, then, of the panic 
of 1837. 

Mr. Dawes. It was the result of the panic of 1837; and 
the same arguments were used during the years that fol- 
lowed that were necessary finally to bring about that legis- 
lation. One bill was passed and then repealed; and then, 
in 1846, this action was taken. The question at this time 
is, Is it possible to get together upon some remedial legis- 
lation which will let the banks of the central reserve cities 
pay their debts to the country banks in times of panic? 
That is the important thing, and the trouble is, that we 
obscure this question with discussions of this bill and that 
bill, involving fundamental changes. The Aldrich Bill, in 
its present form, is unquestionably defective. If I have 
failed to see all of its defects, why does not the Banking 
and Currency Committee attempt to remedy those de- 
fects along the line of something that it seems possible to 
pass? 

The Chairman. There is nothing to start with. 

Mr. Dawes. I think you have a very good start. I think 
it is perfectly practicable, without jeopardizing in any de- 
gree the stability of the currency of the Government of the 
United States, to make it possible for the banks to give us 
at least $121,000,000 of extra emergency circulation. And 
I do hope that the Aldrich Bill may be amended so as to 
provide a larger basis of security, to make the conditions 
less onerous and less difficult. There are a great many ob- 
jections of that sort, that have not been brought out, to 
the cumbersome way in which it works. But my observa- 
tion is that in times of panic — and I sat in the clearing- 



380 ESSAYS AND SPEECHES 

house meetings in the city of Chicago at the time of the 
last panic — the banks are pretty ingenious about availing 
themselves of any device for getting additional currency 
to pay their debts. If you let the opportunity pass at this 
time for remedial legislation, we shall not have any bill 
passed until we have again passed through such a crisis 
as we experienced in 1907. 

This is a time to sink differences as to radical plans, im- 
possible of legislative accomplishment at this time, and to 
set our minds to the consideration in a practical way of 
what is possible. It is not a question of what is best theo- 
retically in this life, but of what is best at the time being, 
considering the rights and the opinions of the other men 
who have a voice in this form of government of ours. This 
is not a time when any one leader, like Alexander Hamil- 
ton, through his genius, and because of the homogeneity of 
the people, and because of the pressure of other problems 
of importance upon other great men who might be inter- 
ested in the question, can centralize in himself the confi- 
dence of the people of the United States in such a way as 
to let him found a banking plan. No plan of any one man 
will ever pass into law. Concessions will be made when 
those things come up practically for passage before the 
Congress of the United States. With our diversified inter- 
ests, with our diversified opinions, with the great breadth 
of our country, any legislation which will be passed in this 
country will be composite, and in every instance it will be 
a compromise. And yet I have seen very little effort to 
reach a common basis after this time of great emergency, 
when we were very much nearer going over the brink than 
the great majority of our people think at this time in con- 
nection with the situation that existed in New York. As 
Mr. Fowler very well said, it was because some men like 
J. Pierpont Morgan rose above small things and, at self- 



THE ALDRICH BILL 381 

sacrifice, helped the situation, that we got through as well 
as we did. 

The great misfortune of this country at this time is that 
we are spending so much time discussing the faults of our 
system and comparing our system with others. Andrew 
Carnegie said the other day that we had " the worst bank- 
ing system in the world." As a matter of fact, the banking 
power of the United States is nearly forty per cent of the 
total banking power of the whole world. We have built up 
our banking system from the bottom up; not from the top 
down. We have built up our banking system under a dif- 
ferent theory from that of Continental Europe. We have 
nearly twenty thousand differentiated banking units, in- 
dependently manned, where the man who goes before one 
of them has the chance of personal contact with the man 
of sole authority in the matter of making loans. He does 
not have to go to the agent of a branch bank, acting under 
delegated authority, exercised at a distance, and necessa- 
rily circumscribed. 

This system of separate and distinct banking units is 
always essential for the best development of an undevel- 
oped country. Our banking system is that which has been 
best for the magnificent commercial development of this 
country, and we do not hear anybody apologizing for that. 
Hand in hand it has gone with the commercial develop- 
ment of this country; and the commercial development of 
this country is dependent upon this banking system of 
ours. And yet we hear it held up in comparison with the 
banking system of the Dominion of Canada, whose entire 
banking power is less than the banking power of the one 
city of New York by nearly fifty per cent. That is the 
model that is held up to us. 

I say we have unique conditions. We have a unique 
country. We have a unique theory on this side of the water 



382 ESSAYS AND SPEECHES 

that it is the right of the small institution and the small 
business man to protection which has resulted in our mar- 
velous commercial and banking growth. I have no pa- 
tience with this wholesale and widespread criticism of the 
greatest banking system in the world. See how it passed 
through the last panic — how small the losses to its de- 
positors. Why, two banks failed under the branch-bank- 
ing system of England, to which Mr. Fowler was referring, 
where the losses were about as much as the losses of the 
entire national banking system of the United States for 
the whole period of its existence. You cannot break some 
great central bank here and spread misery and desolation 
throughout the United States. We have too many feet to 
stand on. 

There are compensations in our system. It may be that 
as we grow older, as our country grows and becomes more 
developed, we can make more of the savings incident to 
branch banking; that we can have some of the benefits of 
the fluidity in the flow of circulation incident to branch 
banks and incident to a central bank. But that is in the 
future. W r e cannot reach it at this time legislatively in 
any way. And instead of holding our banking system and 
its defects up to the scorn of our people; instead of seeking 
to show how much better we can make the banking system 
of the United States if any one of us could reform it, if any 
one of us could change the whole system and start the kind 
of a system which they have in Continental Europe, con- 
sisting of the large bank ramifying out through its branches, 
let us pass at this time, as patriotic citizens, that kind of 
a law which will enable this magnificent banking system 
of ours in the next panic not to repudiate its obligations. 
The banker in the reserve city, who had to refuse the little 
country banker, located by himself out in the country, the 
money necessary for him to keep his banking doors open, 



THE ALDRICH BILL 383 

without a chance to put the iron fence around his money 
that the clearing-house arrangement did in the cities of the 
United States, felt as if we should have some remedial 
legislation. And it resulted in the expression, I dare say, 
in every clearing-house in this country, of the need of some- 
thing like that in time of emergency. 

The men who expressed that need are not students of 
economics. These resolutions which come to you are not 
the expressions of those men in large numbers who have 
studied this question. If you look at the resolution of the 
clearing-house of Lincoln, Nebraska, you will see that there 
is a very suspicious similarity to the language of the reso- 
lution of the clearing-house of the city of Chicago. People 
in connection with these questions are apt to take at par 
the deductions of the man who make a study of them; 
and the great misfortune in this country is that there are 
not more men making a study of them who have not bills 
of their own to get through Congress. I do not mean in 
any way to reflect upon the chairman of this committee, 
who has done one of the greatest works in the education of 
the people of this country on this matter. But I do main- 
tain that his greatest usefulness, and your greatest useful- 
ness, and my greatest usefulness, and the greatest useful- 
ness of any man interested in this question at this time, is 
not to pick flaws in the Aldrich Bill except for the purpose 
of making a better suggestion. It is practicable, it is possi- 
ble, to give emergency circulation to the central banks and 
to get the banks — 

Mr. Waldo. If we, or any one of us, believe that the 
Aldrich Bill would be a serious detriment to the country, 
should we feel inclined to pass it? 

Mr. Dawes. Not at all; not at all. But there should be 
a sincere effort made to correct the defects of the Aldrich 
Bill in some way. 



S84 ESSAYS AND SPEECHES 

Mr. Waldo. Why should we try to correct that which 
we believe to be absolutely bad? 

Mr. Dawes. If that is your conviction, founded upon a 
careful study, of course you will be governed by your own 
sense of duty. But my own hope is that at this time, con- 
sidering the great need of the country, we may have in- 
telligent cooperation for the passage of some bill at this 
time giving relief . And I do believe that the Aldrich Bill, 
faulty as it is in certain respects, constitutes at this time 
the best groundwork for the passage of helpful remedial 
legislation. 

(At this point, by request of Mr. Dawes, the stenogra- 
pher read aloud the question asked by Mr. Prince at the 
early part of this session, as follows:) 

Mr. Prince. It has been stated before the committee 
that for about nine months of the year there is a redun- 
dancy of the currency; that during the crop- moving season 
of the year there is a greater demand for currency; and that 
if the provisions of the Aldrich Bill with reference to the 
reserve were in force during those crop-moving seasons of 
the year (to illustrate, at Minneapolis and St. Paul), they 
would be absolutely helpless to comply with the provisions 
of the bill and at the same time give the currency necessary 
to move the crops. You are giving, if I get your statement 
correctly, the statement of the month of February, when 
the banks throughout the United States, as a result of 
this currency trouble, had been piling up reserves in their 
banks. What is your answer to the other statement as to 
the crop-moving season? 

Mr. Dawes {during the reading of the foregoing ques- 
tion). Where was that stated? 

Mr. Prince. I think you read it a while ago. You read 
something about two hundred millions, I think — that in 
the crop-moving season there is two hundred millions re- 



THE ALDRICH BILL 385 

quired. That is in line with the statement of the gentleman 
from Minneapolis, who declared before this committee (I 
will put that in) that if the reserve provision, which is no 
part of an emergency measure at all, was inserted in the 
bill, and became a part of the permanent law, it would 
seriously cripple and impair the business of the North- 
west. 

Mr. Dawes. My answer to that is this: That the whole 
purpose of this bill is to keep more money in the banks 
where the crops are to be paid for, so that the demand of 
the country banks on the reserve cities and the central 
banks for currency, which produces this contraction of 
credits there, will not be necessary to that extent. In other 
words, that it is only in times like these, when there is a 
redundancy of money and when the bank reserves are full, 
that it is possible to impound it by such a provision as the 
Aldrich Bill contains, so as to render unnecessary this 
trouble in the fall incident to the shipment of $200,000,000. 

To be sure, as I show here, the Aldrich Bill will impound 
only about $67,000,000 of this $200,000,000 in the country 
banks; and all that, of course, would not be in Western 
country banks, so that it would be less than that. But to 
that extent it prevents the demand for so large an amount 
of currency. For when money is redundant, as Mr. Prince 
says, in times like these, it is shipped down to New York 
and it is loaned by the banks there, since they have to get 
it back in the fall, on the Wall Street speculative exchanges. 
Then your credits puff up. Then, when the banks com- 
mence to ship the currency, comes the congested condi- 
tion. Then come the high interest rates. Then comes the 
frightening of the people, as a result of trying to get the 
money they need. So that I do not see just the point of the 
argument that Mr. Prince is making, because the Aldrich 
Bill will lessen the amount which will be obtained from 



386 ESSAYS AND SPEECHES 

these country banks, and will therefore lessen the disturb- 
ance incident to the shipment back of the money. My 
contention is that there is no need in general business of 
all of this cash reserve that the banks hold at this time, 
because if there was, they would use it in making their 
loans, etc. But they have been frightened by this last 
panic, and they are keeping it on hand. Gradually, as we 
get away from it, they will send it back into the reserve 
cities to get the two per cent. Confidence will be restored, 
and in a short time there will be this great disproportion 
between the aggregate deposit credits and the cash reserve 
of the country, which, in time, precipitates trouble such as 
we have had. 

Mr. Pujo. I should like to ask you one question there: 
Do you believe it is necessary for this Congress to pass 
emergency legislation of some kind? 

Mr. Dawes. I do. 

Mr. Pujo. To avoid another panic this fall? 

Mr. Dawes. I do not think panics can ever be avoided. 

Mr. Pujo. I mean a panic this fall? 

Mr. Dawes. But the evil results of panics can be very 
greatly mitigated by the passage of legislation providing 
emergency circulation. My own idea about emergency 
circulation, if I may be pardoned just a minute, is more 
along the line of Mr. Fowler's. I made a recommendation 
as far back as 1899 that banks should be allowed to issue 
currency unsecured by any bonds, subject to a heavy tax 
like this, along the line of Mr. Fowler's theories, which, as 
a rule, are along correct and scientific lines. But let us do 
something, gentlemen. If we must take bonds (which 
makes it cumbersome and difficult to get) in order to get 
this emergency circulation, do provide for some sort of an 
emergency circulation, so that the banks will not have 
again to repudiate their obligations. 



THE ALDRICH BILL 387 

The Chairman. Do you think there is any probability 
of a panic within a year or two? 

Mr. Dawes. I do not; no, sir. 

The Chairman. There is no chance of one? 

Mr. Dawes. Not the least. There is going to be no 
trouble soon. 

Mr. Waldo. You do not think there will be any need of 
this kind of emergency currency — 

Mr. Dawes. For many years. 

Mr. Waldo (continuing). For ten or twelve years, probably? 

Mr. Dawes. I should not like to go that far. 

Mr. Waldo. For several years, at any rate? 

Mr. Dawes. Yes. I do not think there is any danger, 
therefore, of any very great demand on the reserves of the 
United States. It is purely a temporary emergency meas- 
ure. It will be found such. But it does not make any dif- 
ference if it is fifty years before we need it, it should be 
passed at this time. 

Mr. Waldo. Do you not think it would be better to try- 
to have a commission appointed, or in some way arrive at 
a proper system of currency at this time, rather than to 
adopt some emergency measure that would perhaps pre- 
vent any other legislation? 

Mr. Dawes. As I tried to explain before, I am never a 
sympathizer with a postponement of the correction of an 
evil. I do not see any connection between the appointment 
of a commission to consider some better change and the 
giving of this relief which will make it possible for the banks 
of the country to get along better through a panic. Pass 
your emergency bill, faulty as it is, and give the business 
interests of this country relief. 

Mr. Waldo. If I understand you at all, Mr. Dawes, you 
do not pretend that this bill is going to give any relief ex- 
cept at the time of such a panic? 



388 ESSAYS AND SPEECHES 

Mr. Dawes. That is all. 

Mr. Waldo. The real relief that the country needs is 
some measure by which the banks can change their credits 
from book form to note form, is it not? Is not that the real 
trouble? 

Mr. Dawes. I do not want to answer that question gen- 
erally. I have opinions on that subject, but I think that is 
one need. Yes; that is a need. The difference between you 
and me in our judgment is this: I do not think you will 
have any chance in the next fifteen years to pass any bill 
relating to your banking system radically changing the ex- 
isting order of things, desirable though it may be, because 
you have not done anything since the panic of 1893 in con- 
nection with banking. 

The Chairman. Oh, yes; we have. 

Mr. Dawes. You passed the law of March 14, 1900, of 
course. 

The Chairman. Fourteen years ago (I will go back as far 
as that) you could not find in the American Bankers' Asso- 
ciation, with a search warrant, a credit-currency man, but 
last fall at Atlantic City they were unanimously in favor of 
a credit currency. 

Mr. Dawes. Yes; and I want to say in that connection 
that it would be a great deal better for the passage of any 
radical reform measure if the American Bankers' Associa- 
tion would entirely absolve itself from the responsibility 
of outlining the financial legislation of the United States. 
I am talking of that matter from the practical stand- 
point. 

Mr. Waldo. Where are you going to find anybody 
who — 

Mr. Dawes. Let me finish on that point. That has been 
one of the troubles in connection with it. If we were going 
to make a law regulating the packers in connection with 



THE ALDRICH BILL 389 

the inspection of meats, we should not go to consult the 
packers about the kind of a law to get up. 

Mr. Waldo. But that is what we did. 

Mr. Dawes. You may talk with them; but — 

The Chairman. That is just what we did do. 

Mr. Dawes. Of course it is all helpful in this way — 

The Chairman. I only speak of that matter as showing 
the progress of education. 

Mr. Dawes. Yes; education is progressing; but in my 
judgment it has not yet progressed to the point in this 
country where you will get remedial legislation until after 
you have had another period of trouble. You did not get 
such legislation satisfactorily at all after the panic of 1893. 
You got some advance after the panic of 1873, in the Re- 
sumption Act. You got some after the panic of 1893, in 
connection with the passage of the gold standard measure; 
and you can get something now, after this panic, if you 
will get together. But if you let this opportunity pass to 
get through some remedial legislation, and let the business 
of the country run on, and it goes on for a while without 
any serious bumps of difficulties, in my judgment you will 
get through no radical bill, at least no bill more radical 
than this. It is hard enough to get through this measure, 
which is really an extremely conservative one, despite 
your own alarm about certain features of it, Mr. Fowler. 
Nobody denies the necessity of relief at this time so far as 
the general business of the country is concerned. Nobody 
has portrayed more eloquently than you the necessity of 
relief at this time. But at a time like this, when we can do 
it, let us strengthen our cash foundation in connection with 
our reserve, and get some sort of emergency circulation for 
relief. 

Mr. Waldo. Do you not understand that the real ques- 
tion is whether this is relief or not? That is the real ques- 



390 ESSAYS AND SPEECHES 

tion. The question is whether this prescription will not 
kill the patient instead of relieving him. That is the real 
trouble. 

Mr. Glass. Why should we immediately pass the Aid- 
rich Bill if you say it will not be utilized for twelve or fif- 
teen years? 

Mr. Dawes. I have tried to explain that. I have tried to 
make it clear that it is only at times when public sentiment 
is largely aroused in the country as to the necessity for ac- 
tion that we can get legislation which affects the things in 
which the great body of our people are interested. The 
status quo under our system of government, with the veto 
power and the passage by the two houses of Congress and 
the method of enacting laws, is such that it is very difficult 
to disturb legislative conditions, except when public feeling 
is generally aroused to the necessity of action, as it has 
been aroused by this panic. Some legislation ought to be 
the result of this panic. If you do not pass it at this session 
of Congress, and business goes on in its usual way, and 
credits become expanded, and this money which is now in 
the banks of the country goes out into speculation and goes 
into Wall Street, you will have your credits built up again, 
and you will not get any relief in the matter of reserve laws, 
because the point will be made then that Mr. Forgan made 
when I was Comptroller of the Currency, that after the 
money has gone into business you cannot draw it out with- 
out practically creating a panic. 

A time like this, when you have stopped your machine, 
got it geared up right, and built up your cash foundation, 
is the time to act. The idea of a country bank with a hun- 
dred thousand dollars of deposit liability trying to run with 
six thousand dollars cash — 

Mr. Waldo. If you were advocating a bill simply to make 
all the banks keep their reserve in their own vaults, I could 



THE ALDRICH BILL 391 

see that your position would have something behind it; 
but instead of advocating that, you are advocating the de- 
pletion of reserves by putting them into bonds — into per- 
manent investments. 

Mr. Dawes. It is a depletion of reserves by putting them 
into bonds, which become immediately available in time 
of emergency with the actual cash; so that this plan does 
not decrease the amount of lawful cash in the banks at 
this time, but adds the possibility of that amount to it. 

Mr. Waldo. I think there is a fault in your statement 
there, because it certainly does deplete it. It seems to me 
it must. The process is that, first, you must take your law- 
ful reserve and buy these bonds. That is your first propo- 
sition? 

Mr. Dawes. Yes. 

Mr. Waldo. Your next proposition is to deposit your 
bonds and get notes? 

Mr. Prince. Ninety dollars for each one hundred dollars. 

Mr. Waldo. Yes. The next step, you say, is to take those 
notes back to the United States and get lawful reserves for 
them. The next step after that is that the United States 
will say, "Pay up your notes"; and your lawful reserves 
go back into the vaults of the United States Treasury, and 
you are right where you started. 

Mr. Dawes. Will you let me make a statement? 

Mr. Waldo {continuing). Except that you have to pay 
expenses of the operation. 

Mr. Dawes. Let me make a statement as to what — 

Mr. Waldo. That is the result; is it not? 

Mr. Dawes. No, sir. 

Mr. Waldo. How are you going to compel the United 
States to keep your notes and not compel you to pay them 
back again? 

Mr. Dawes, Just let me trace exactly what takes place. 



392 ESSAYS AND SPEECHES 

You have traced it in your way. Now, please let me go 
ahead without interruption. 

Mr. Waldo. Yes; I am going to — 

Mr. Dawes. Go ahead if you want to. 

Mr. Waldo. No; I am going to let you go on. 

Mr. Dawes. The banks, in the first place, will buy, in my 
judgment, about $134,999,880 of these bonds. They will go 
into their reserves. In buying those bonds they are not 
going to lessen the lawful money in the banks of the United 
States. They will not use currency to buy those bonds. 
They will sell some of their other bonds. They will con- 
tract some of their loans, perhaps. I do not think they 
will; but let us say that they will contract some of their 
loans, and they will buy that $134,999,880 of bonds, which 
is a very small transaction for the national banking system 
of this country, with over $8,000,000,000 of resources. 
Well and good. They have bought them. They have not 
lessened the amount of lawful money in any of the banks 
of the United States — not a bit. Then we will say that an 
emergency comes up when we need more currency. The 
banks, as a result of that transaction, are running with less 
reserve in cash resources — that is where the confusion 
exists — but not less reserve in lawful cash. They are run- 
ning with two per cent more reserve in actual lawful money 
than they had before they bought those bonds. In buying 
them they have not reduced the lawful money on deposit. 

Well and good. You have got up to that point. There 
is no decrease there. Now, here is where the increase 
comes. When the panic comes, and there is need of addi- 
tional circulation in the United States, these banks, that 
have not diminished in any way by that purchase the 
amount of lawful money in their hands for use and for 
loaning, will take those bonds, which are a part of their 
reserve, — I am just stripping this of technicality, — to 



THE ALDRICH BILL 

the subtreasury of the United States, we will say, at Chi- 
cago or somewhere else, and leave the bonds, and get 
ninety per cent of their value (which, as I figure here, 
would be one hundred and twenty-one million and some 
odd dollars) in emergency notes. That would be a distinct 
addition to the circulation of the country. They would 
have to pay on that circulation a tax of six per cent for 
four months. To be sure, the Government of the United 
States would be liable, if called upon, to redeem those 
notes in lawful money during the four months that they 
might be out. As a matter of fact, they would probably be 
out on an average much less time than that. The clearing- 
house certificates were out on an average much less time 
than that, and they would be fully as expensive as clearing- 
house certificates. They would come in mighty quickly, I 
will tell you; and the banks will be very glad to get them 
back. They would be just like clearing-house certificates 
in that respect. They would be in before the four months 
had elapsed. 

But suppose somebody did come and make a demand 
for lawful money on these notes, Then the emergency 
notes would be withdrawn from circulation and the lawful 
money would go out. But the notes are printed alike, the 
emergency notes and the other bank-notes; and when the 
banks came to redeem them, they would deposit lawful 
money of the United States, which would cause a contrac- 
tion of the currency after the need of the extra amount 
was past. It is an addition, not a subtraction. It cannot 
be figured out as giving anything except a temporary in- 
crease in the circulation to the extent of ninety per cent, 
the amount allowed by this bill. 

Mr. Waldo. That would be assuming two things. In the 
first place, it would be assuming that the bank already had 
its money invested in these bonds. 



394 ESSAYS AND SPEECHES 

Mr. Dawes. No; I am not assuming that at all. 

Mr. Waldo. You must assume it. 

Mr. Dawes. That has been the trouble all through this 
discussion. Many of the bankers of the United States have 
confused lawful money and cash reserves. 

Mr. Waldo. Let us drop the lawful money altogether. 

Mr. Dawes. Very well; let us drop it altogether. 

Mr. Waldo. It must be national bank-notes, or in some 
way — 

Mr. Dawes. Not at all. The balances will be in checks 
and drafts. If we want to go into the market and buy 
municipal bonds, do we take lawful money or bank-notes? 
No; we give our cashier's check. We do that business on 
the same terms that ninety per cent of the business of the 
United States is done — in a check or draft. Do you sup- 
pose that the national banks of the United States cannot 
buy $135,000,000 of bonds without using lawful money? 
Why, the bulk of the business of this country is done on 
credits. This is a question of lawful money that we are 
talking about now. The banks have $714,000,000 of bonds 
and securities to sell if they desire. They do not even have 
to contract any loans if they do not want to in order to get 
these bonds. 

Mr. Waldo. They do not get lawful money, do they? 
They get their own notes; that is all. They get a right to 
use their own credit. That is all they get. 

Mr. Dawes. Why, of course, they get a right to use their 
own credit, in a shape which will pass from hand to hand 
and which will tend to relieve the country in time of emer- 
gency. There is no contraction about it. There is no im- 
pounding about it which will result in a contraction of 
currency in the United States, but it will result in an addi- 
tion. If the banks hold this part of their reserves in bonds 
under the Aldrich Bill, it will result in time of panic in a 



THE ALDRICH BILL 395 

possible addition to the money which can be used in the 
United States in business, from hand to hand, of at least 
$121,499,892. And in addition these country banks will 
hold about $67,000,000 more lawful money on hand with 
which to supply their depositors. It is perfectly plain, I 
hope. If anybody has not grasped that, I should like to be 
questioned further about it, because I do want to make 
that plain — that the Aldrich Bill is not going to tie up 
anything; that it gives additional emergency circulation. 

Mr. Weeks. Let me call your attention to this one point: 
You have discussed this question of the location of re- 
serves much more exhaustively than has heretofore been 
done before this committee. But take the country bank 
that has to keep a million dollars of reserve. Under the 
present law it keeps $400,000 of that money at home and 
$600,000 with the reserve agents. 

Mr. Dawes. Yes; under the present law; you are right. 

Mr. Weeks. The country banker comes here to this 
committee and says: "If you require me to keep more at 
home, eight per cent or ten per cent, or whatever it is, I 
will have to call loans in order to do that." Why? "Be- 
cause that $600,000 is necessary for the proper conduct of 
my business with my reserve agents. I have to have $600,- 
000 in their hands all the time, in Louisville, in Atlanta, in 
Chicago, in St. Louis, in San Francisco, in Boston, in New 
York, and in Philadelphia. I cannot carry on my business 
unless I have $600,000 with them. Therefore, if you com- 
pel me to bring some of that $600,000 home, I will have to 
call my loans and restrict my credits at home in order to do 
it." What have you to say to that? 

Mr. Dawes. One of the most experienced bankers in the 
city of New York, Mr. George F. Baker, president of the 
First National Bank of New York, was talking with me 
recently, and I asked him his opinion on that very subject. 



396 ESSAYS AND SPEECHES 

He said: "If we have these bonds on hand and know that 
we can get this money, we will dip into our reserves in time 
of emergency, and we will use them more fully. We will 
ship more currency to the Western banks if we know that 
when we do we will not have to shut up because we cannot 
get anything to pay out over our counters in an emergency." 

There will be, with this amount of possible emergency 
circulation which the banks can take out, a freer use of re- 
serves. That will offset to some extent the point which you 
make. I do not admit at all, Mr. Weeks, that the necessity 
for scattered accounts is such that it will make it necessary 
for the banks to carry any materially larger reserve. It 
may cause some difference, but not to the extent neces- 
sary to cause, with $98,000,000 of surplus lawful money 
in the banks of the United States now, any material con- 
traction of loans such as ought for a minute to be con- 
sidered in connection with the benefits to be derived from 
this kind of a bill. 

Anything which goes to increase the amount of cash re- 
serves in the country banks and to relieve us of this very 
great menace which all our financial authorities in the past 
have repeatedly called our attention to, ought to be put 
into effect at this time. It may involve some hardship on 
the country banks, but this is not simply a banking meas- 
ure. This is a measure for the people of the United States. 
That is the point about it. The trouble is that we drift off 
too much into such questions as to how it will affect (as 
Mr. Prince said there) the banks that will have to buy 
these additional government bonds — the question of ex- 
pense. There is no impounding of lawful money in that 
proposition of bond purchases, any more than there was in 
this emergency matter. That is only important in so far 
as it affects the probability that the banks will use this 
measure of relief for the benefit of the public. You repre- 



THE ALDRICH BILL 397 

sent, here on the Banking and Currency Committee, the 
people of the United States. You are concerned, of course, 
with the protection of all the rights of the banks under the 
law. But primarily the question of profit or lack of profit 
to the banks is important with you only on the point as to 
whether or not profit or the lack of profit will cause them 
to do something or refrain from doing something in the 
public interest and for the public welfare. 

Mr. Weeks. We are not legislating for the purpose of 
giving banks profits; but we have sense enough to know 
that if we legislate in a way that is going to hurt the banks, 
it is indirectly going to hurt all the people. 

Mr. Dawes. The country banks of the United States are 
not going to be hurt by the passage of any reserve provi- 
sion requiring them to keep $2000 more on every $100,000 
deposits in cash in their vaults. 

Mr. Weeks. I do not disagree with you necessarily about 
the reserve requirements of this bill. 

Mr. Dawes. And this bond feature is extremely impor- 
tant, because, in my judgment, unless in connection with 
the Aldrich Bill some provision is passed which gives an 
inducement to the banks, in the way of a larger return on 
a portion of their reserve than is given under the present 
law, they will not buy these bonds. But having this chance 
to carry them in their reserve makes it very probable, and 
in fact almost certain, that the banks in the next emer- 
gency will have on hand $134,999,800 of these bonds upon 
which they can take out emergency circulation; and they 
will have exchanged, probably, to get that kind of securi- 
ties, a portion of the $714,000,000 of bonds and other 
securities which they now hold. It is no hardship for the 
banks of the United States as a whole to change a small 
proportion of their present bonds into bonds which will be 
available for circulation under this bill. 



398 ESSAYS AND SPEECHES 

Mr. Weeks. Would you not rather have commercial 
paper as a basis for circulation than bonds? 

Mr. Dawes. I would, a great deal; and if some provision 
of that kind could be enacted — if Mr. Fowler, for in- 
stance, with his ability and knowledge of this question, 
would devote his attention to making in some way com- 
mercial paper available as a deposit to secure this cur- 
rency, or remedying those points of this bill in which he 
deems it defective, he would be doing the greatest service 
to our country at this time. But do not let us go into an- 
other panic without some way of getting money to pay the 
debts we owe. 

Mr. Prince. Do you favor striking out all of the bond 
provisions of every kind and character and basing these 
notes upon commercial paper? 

Mr. Dawes. Mr. Prince, you are asking now for my per- 
sonal opinion. As long ago as 1900, I think it was, in one 
of my Reports to Congress I recommended that an emer- 
gency circulation be provided for without bond security, 
so heavily taxed — and I did not make the tax at any time 
over six per cent — that its retirement would be compelled 
as soon as the stringency was over. I do not differ with 
you theoretically on those things; and if you can get a bill 
through like that, without any security, subject to such a 
heavy tax (it is only going to be a temporary arrangement), 
I would be most certainly in favor of it. But the point I 
make is that we cannot get a general acquiescence in any 
law of that sort which changes the fundamental principle 
of our note issues, faulty as it is, defective as it is. I do not 
deny the force and efficacy of all these arguments which 
you make. 

Mr. Waldo. If you would support with the same force 
and energy the opinions which you really have upon this 
question, instead of supporting, as you do now, something 



THE ALDRICH BILL 399 

which you believe is a mere makeshift, would you not do a 
great deal toward getting through proper legislation? 

Mr. Dawes. I do not want that word "makeshift" used 
in regard to the Aldrich Bill. Nothing is a makeshift 
which will enable the banks of this country to increase 
their circulation in time of need to the extent of $121,000,- 
000. The Government has about $67,000,000 on deposit 
in New York to-day; and since December 1 there has been 
$55,000,000 returned. That makes over $120,000,000. 
And see what good the use of that $120,000,000 did in New 
York! Why, it was life-blood at that time to the banking 
institutions in the West, as well as to the banking institu- 
tions there. Here is a provision, irrespective of the im- 
pounding of $67,000,000 lawful money, which would put 
$121,000,000 additional emergency currency into circula- 
tion, making a total of $189,729,000, which would be added 
to whatever relief could be obtained from the United States 
Treasury in the shape of government deposits. 

I do not believe that if I or anybody else should go into 
a campaign for any kind of money except something which 
is based upon a security which the people regard as abso- 
lutely certain, we should make headway. I am far from 
being conceited enough to suppose that I have any special 
influence in the matter. But you people have done a wonder- 
ful work here on this committee, as I say, in the education 
of the people of the United States in correct banking princi- 
ples. In my judgment, however, you are still a long way 
off from that consensus of opinion, even among yourselves, 
which will give any prospect of relief when times are good. 
So, I say, give us some relief at this time. 

Mr. Waldo. Let me tell you this : I think this committee 
has been canvassed a good many times; and, so far as I 
know, there is not a single member of this committee that 
does not believe that the enactment of the Aldrich Bill will 



400 ESSAYS AND SPEECHES 

be a very serious detriment to the whole business interests 
of the country, without regard to how it will affect the 
banks. I think that is the fact to-day. We did not start in 
with that opinion, by any means. There may be one or two 
that differ with us, but not more than that. 

What I want to call your attention to is this: I think 
your opinions are not very different from those of other 
men who have studied this question. You believe that 
credit system of some kind is the only system that will ever 
put the banks in proper shape. It seems to me that a man 
of your ability and your experience and earnestness in this 
matter ought to devote his abilities to trying to enforce his 
real belief, instead of something that is not his real belief. 
That is what I want to call your attention to. 

Mr. Dawes. In view of my rather forcible suggestions 
and conduct, that is a very mild and courteous rejoinder 
on your part; and I thank you. 

Mr. Gillespie. I should like to have your opinion on the 
effect of the Aldrich Bill on the price of the securities de- 
scribed in the bill. 

Mr. Dawes. That brings up just this point: The Treas- 
urer of the United States has made some figures, based on 
the bill in its original form, as to the amount of these bonds 
that would be available, that could be purchased by the 
banks under the provisions of the Aldrich Bill. That was 
when the bill provided that they should only take the 
securities of towns of 20,000 inhabitants and upwards. 
The question of the price will depend upon the supply, 
you see. He estimated at that time, in a general way, that 
there were $1,765,821,218 of these municipal bonds and 
public bonds which they could buy under that old provi- 
sion. The Aldrich Bill, as it has been amended, takes out 
that population restriction altogether and opens up nobody 
knows how much of a field. For instance, it will allow the 



THE ALDRICH BILL 401 

drainage district bonds and the park district bonds of 
Chicago to come in, and the bonds of towns all over the 
country. 

Mr. Gillespie. And the bonds of school districts? 

Mr. Dawes. Yes; school districts of all sorts. I asked Mr. 
Aldrich for his opinion about that matter, and he seemed to 
coincide in the opinion that $4,000,000,000 would not be 
an excessive estimate of the amount of bonds that would 
be available. Out of that amount the banks would have to 
purchase, in the first instance, about $135,000,000 of these 
bonds; and if they took the emergency circulation they 
would have to purchase more. But it would probably have 
some effect in appreciating the value of these municipal 
securities, which, with the public getting the benefit of it, 
is certainly not a public evil. Of course, they do not al- 
ways get the benefit of it, but where they are issuing them 
they get the benefit of it in the increased demand. 

Mr. Crawford. I would like to ask you this question, 
Mr. Dawes: In 1893 and 1894 the national banks reduced 
their circulation below $200,000,000 during the panic. 
During this panic they increased it up to $690,000,000, 
I believe. What is the difference between the conditions 
in 1893 and 1894 and the conditions in 1907 that made that 
difference in the amount of circulation the banks put out? 

Mr. Dawes. Have you figures on that point? I do not 
recollect; but I can tell you something about one reason 
why the circulation was not increased. I discovered, when 
I was Comptroller of the Currency, — and Mr. Fowler, 
of the Currency Bureau, who is here, will bear me out in 
this, — that there were over $40,000,000 of orders for 
national bank-notes canceled because the Comptroller of 
the Currency did not have them on hand. The reason the 
Comptroller of the Currency did not have them on hand 
was this — and it shows how important in their general 



402 ESSAYS AND SPEECHES 

effects little things sometimes are: He did not have them 
on hand because in the Treasury Department there was 
not a room big enough to hold them. It would have cost 
us probably $10,000 at some time in the past to enlarge the 
vault so as to provide room for them. On just the same 
principle, when the next panic comes up, if something is not 
done now, we will say : " Why, it would have been very easy 
at that time to have passed this remedial measure; but we 
could not get this bill just right, and we could not get that 
bill just right, and we did not do it, and so here we are." 
And that is just the way it was in regard to those notes. 

Mr. Crawford. They are reducing their notes all the 
time. 

Mr. Dawes. But I will tell you — it was not the panic 
which affected the national bank-notes at that time, be- 
cause the banks, in the first place, could not get the notes 
out. A panic comes suddenly, and there is always a 
demand at such times for more notes. If the notes are 
printed, well and good; and they get them out. But you 
know we did not have the bond issues at that time, in 1893, 
that we have now. And, as Mr. Fowler points out in many 
of his addresses, the trouble with our bond-secured cir- 
culation is that it is the question of the profit to be had in 
the purchase and sale of these government bonds which 
secure them which largely determines the amount of cir- 
culation in existence in the country. It does not rise and 
fall in accordance with the natural laws of business. That 
is the point which he makes against this bond-secured 
system ; and that is one reason, and I think a very strong 
reason, why he objects to the perpetuation of even a recog- 
nition of the system in connection with this Aldrich emer- 
gency plan. But at that time, prior to 1893, you will find, 
if you go back, that the amount of circulation that was out 
was dependent upon the fact that there was or was not a 



THE ALDRICH BILL 403 

profit to be had ip the bonds at that time which justified 
them in taking out the circulation, whereas later — 

Mr. Crawford. The premium was high? 

Mr. Dawes. The premium was high; there were not so 
many of them, you know. 

Mr. Crawford. In other words, they issue circulation 
only when it is profitable as a banking proposition? 

Mr. Dawes. That is it. 

Mr. Prince. Let me ask you one question, Mr. Dawes. 
Assume that this bill passes and becomes a law, and that a 
few days thereafter there is a necessity for using emergency 
currency thereunder. It has been stated to the committee 
that the machinery could not be put in order to carry out 
the provisions of the bill inside of from nine months to 
a year at least. What would be going on in the mean 
time? 

Mr. Dawes. In the first place, I will answer that ques- 
tion by saying that you would not be hurt any, or materi- 
ally (that is, we would not be any worse off, practically, 
then), than we shall be if you do not pass this bill. If 
you do pass it, the Secretary of the Treasury has not yet 
determined how long it will take to get the Treasury 
Department ready. I was talking to him about that 
yesterday. 

Mr. Prince. What did you find out? 

Mr. Dawes. He said that he had not yet been able to 
determine how long it would take to put this machinery 
in operation, and that there are very important require- 
ments which should be included in this Aldrich Bill. You 
will have to see about your vault room. You do not want 
to pass this bill without some reference to vault room. If 
you do, you will be in the same fix that the Comptroller's 
Office was in 1893, when the small vault room was the 
cause of their being unable to supply $40,000,000 of orders 



404 ESSAYS AND SPEECHES 

for notes which would have gone out in the panic, and 
would have helped to relieve the congestion that existed 
to that extent. Just think what $40,000,000 of currency 
would have meant to the banks of the United States at 
that time. But, Mr. Prince, if you will devote your abilities 
— and you have been a careful student of these things — 
to suggesting a few changes in the law which will enable 
the Secretary of the Treasury to get ready quicker, you 
will be doing the country a great service. I think you 
suggested reform on my part. 

Mr. Prince. I think, generally, the people's efforts at 
reform are misdirected. Perhaps my efforts are misdi- 
rected. Now, we are in this position: Here is a great com- 
mittee of the House that has presented to it a bill that was 
for four months in process of preparation before a very 
distinguished coordinate branch of this Government. They 
have presented to us a finished product that, I am frank 
to say to you, no human being dares to stand up before 
this committee and say he wants to have passed in the 
shape that that finished product is presented to us. 

Mr. Dawes. Mr. Prince, do you ever regard a bill from 
the Senate of the United States, or a bill from the House 
of Representatives of the United States, as a finished prod- 
uct until it has passed and been considered by the other 
House in legislation? 

Mr. Prince. No. 

Mr. Dawes. Then, why do you call it a finished prod- 
uct? 

Mr. Prince. I call it a finished product because it is the 
result of their deliberation, and of all of their deliberative 
machinery; and yet you say that provisions have not been 
properly made for several important things. I find here a 
statement in the Chicago Tribune of to-day, April 13, just 
coming to hand, which says : — 



THE ALDRICH BILL 405 



NATION-WIDE WAR ON ALDRICH BILL 

Canvass of banks in the large cities shows practically every one 

opposed to Currency Act — Peril to commerce seen — 

Sections regarding reserves and restrictions of loans 

main cause of scores of protests 

Then a list of thirty-seven cities is given — eleven banks 
out of the thirty-seven cities, including state banks and 
trust companies, favoring the measure; four hundred and 
ten banks — national banks — opposing the measure. 
We are presented with that situation. 

Mr. Dawes. Mr. Prince, I do not know why you read 
newspaper articles of that sort as affecting the deliberations 
of a body of this sort. I read the speech that Senator La 
Follette made last week in connection with this Aldrich 
Bill, which did not seem to me to be a proper one for any 
one endeavoring properly and carefully to conserve the 
interests of the people to take as a model for a direction 
in the matter of legislative effort. The trouble with all 
this discussion is that public men seem to have one eye 
on a part of the people, another eye on the banks and on 
Congress, or something else. 

Unquestionably the Aldrich Bill needs amendment in 
some of these essential particulars. But if we study the 
bill itself, irrespective of the newspaper comments on it, 
irrespective of the statements of those who are clearly 
anxious to exploit their own personalities through their ad- 
vocacy or denunciation of the bill, and look at it from the 
business standpoint of the nation as a whole, and at this 
time make an effort to modify it as it needs, it will be a 
very beneficial thing. 

I want to say that there is nothing that is a finished 
product in legislation under our form of government until 
it has passed both houses of Congress, and has been signed 



406 ESSAYS AND SPEECHES 

by the President. The very purpose of having one House 
pass a bill and send it to the other is so that the House of 
Representatives may correct the deficiencies of the Senate, 
and the Senate may correct the deficiencies of the House. 
This is the first time I ever heard any member of the 
House of Representatives suggest that because a bill comes 
from the Senate it must therefore be considered a finished 
product. 

The Chairman. But after the House has put its touches 
on the Senate product, would that be absolute proof that 
it was a finished product? [Laughter.] 

Mr. Dawes. The absolute proof of the finished product 
would be the adoption of the conference report, the pas- 
sage by both houses and the signing by the President of a 
bill which will let the banks of this country pay their debts 
in time of emergency. That is the fundamental thing in- 
volved in this matter. And as public-spirited men it is 
your duty, in any way you can, to reconcile these differ- 
ences and give up the discussion of radical measures which 
cannot be passed now and get behind this simple, practical 
proposition of giving the business men of this country relief. 

Mr. Prince. The reason I read that heading from the 
newspaper article was that it has just come to hand. It 
is not an old paper; it is dated Monday, April 13, 1908, and 
this, I think, is about Tuesday. It is pretty fresh. I must 
confess that I am governed in my actions by the people 
that I try to represent; and if I find the banking interests 
of this country unanimously opposed to a measure, it is at 
least notice for me to halt and find out what is the right 
thing to do. 

Mr. Dawes. To halt and look into it? 

Mr. Prince. Yes; that is what I am doing. Now, what is 
your answer to this? If I am in doubt, what do you say as 
to these four hundred and ten banks? 



THE ALDRICH BILL 407 

Mr. Dawes. I have commented on that in the beginning 
of my speech, and endeavored to show here at considerable 
length (all of which you will find in my argument) why the 
statements of the Chicago Clearing-House resolution, which 
is the model upon which the banks of almost this entire 
country have drawn up their resolutions, are incorrect. 
I have been engaged in the joint debate there. I have been 
pulled by the ears into this controversy. It is not a pleasant 
thing for me to come here and speak in opposition to what 
seems to be the judgment of my fellow bankers and my 
personal friends in the city of Chicago, It is no welcome 
task for me. But I got into this debate in connection with 
that statement of the Chicago Clearing-House, which was 
sent out by thousands all over the United States, and which 
alarmed the people of this country. And I maintain that, 
until an argument has been made on the other side, this 
expression of sentiment on the part of the bankers of the 
United States is not a permanent one. It is based upon 
wrong deductions from the bill. It is based upon deduc- 
tions, as I explained, from the December 3d statement of 
the national banks instead of the February 14th statement. 

I went out to Lincoln, Nebraska, the other day, and 
came from there here. They handed me a resolution of the 
Lincoln Clearing-House Association in which they referred 
to this "one-billion-dollar loan contraction." I do not 
think that the drawing of that resolution such a short time 
after the passage of the Chicago resolution we can regard 
as a mere coincidence — that is, the "one-billion-dollar 
loan contraction." But, starting with Chicago, starting 
with one of the great leaders in advanced banking methods 
in the United States (and, from his standpoint, better 
methods), and taking it up to the American Bankers' As- 
sociation, all of them supporters and advocates of these 
radical remedies (and they may be better, I am not argu- 



408 ESSAYS AND SPEECHES 

ing that), this mistake in taking the national bank state- 
ment of December 3d has produced an erroneous impres- 
sion among the bankers of this country. And I would not 
hesitate at all to take any ordinary group of bankers and 
lay before them both sides of this question — the reserve 
question and all the other questions connected with the 
Aldrich Bill — and feel sure that on the essential points I 
would not find that practically unanimous condition of sen- 
timent. To be sure, in connection with the provision as to 
directors, the banks as a whole, and the people as a whole, 
ought to be opposed to it. But the bill at this point can be 
amended, and can be corrected in other essentials. 

The Chairman. There were to my knowledge but two 
different associations (commercial bodies, chambers of com- 
merce, or anybody that represented anybody else) that 
ever approved this bill from the start. One was a body 
at Louisville, which has since retracted it. The other one 
is at Omaha, and they write me they would retract if the 
man was there who was the inspiration of getting up their 
approval. So that would leave the bill from its birth up to 
the present date without a single supporter in the way of 
a commercial body. 

Mr. Dawes. Mr. Fowler, is that any excuse for you and 
the other members of the Banking and Currency Commit- 
tee to cease making an effort to correct the bill so that it 
will be satisfactory to these people, if it can be done with 
due regard to the public interests, and so that the people 
of this country and the banks of this country can have the 
benefit of an emergency circulation in time of panic? 

The Chairman. I can bring you in a stack that high 
[indicating] of protests against it. I think there are two or 
three letters in favor of it from the start of this thing, and 
we will bring them here if the committee wants them. They 
are against the bill because it is fundamentally wrong. 



THE ALDRICH BILL 409 

Mr. Dawes. I disagree, Mr. Fowler, with that. There 
is not that widespread interest in the financial question 
from the theoretical standpoint. 

The Chairman. It is not theoretical. 

Mr. Dawes. The objects of this bill are all practical. 

The Chairman. They have learned their lessons now. 

Mr. Dawes. Yes; they have learned their lessons now. 
That is just the point. For instance, in connection with 
this clause in regard to directors, what proportion of the 
objections to this bill should you estimate come from these 
people because of the inclusion of that clause, which can 
and should be omitted? 

The Chairman. But all of these people had sent their 
protests in before that. The Chicago people had entered 
a protest before that, and everybody else had. 

Mr. Dawes. Suppose that they all protested, and sup- 
pose that all of the members of these associations had made 
a study of this question — would that relieve you from 
properly making an effort to have this bill amended so as 
to secure an emergency circulation for the country? 

The Chairman. I do not think there is any such thing 
in the world. 

Mr. Dawes. I do not want to get into a discussion of 
the emergency circulation of the Bank of Germany on this 
point. 

The Chairman. There is not a thing in it in Germany, 
Mr. Dawes. Take the five per cent tax; there is nothing 
in it whatever. Take the three years before they increased 
it, in 1900, and the three years afterwards, and you will 
find that the five per cent had absolutely no effect what- 
ever on it. They copied that, as Mr. White well said here 
two or three days ago, from the instances where the Bank 
of England Act had been suspended and imposed a high 
tax. They copied a blunder. 



410 ESSAYS AND SPEECHES 

Mr. Dawes. That has been the trouble, Mr. Fowler, 
with this whole currency debate — it is so cumbered with 
references to foreign countries and foreign systems which, 
however relevant, obscure the main issue. That issue at 
this time ought to be a simple one — some simple device 
to relieve us of the necessity of repudiation in time of 
panic. You may call it a makeshift if you want to, but 
the people of the United States want relief. They are not 
going to get it by any radical bills, and they are not going 
to be enlightened by economic discussions of these other 
banking systems. 

The Chairman. I believe with you that we want to do 
a simple thing; and do you know what I think it is? It is 
to get right; to stop going wrong. 

Mr. Dawes. Therefore, I hope you will do what you can 
to get this Aldrich Bill passed when properly modified. 

Mr. Glass. Can you imagine a more dreary prospect for 
a measure than there seems to be for the Aldrich Bill 
now, with every member of the Banking and Currency 
Committee against it? 

Mr. Dawes. I am very sorry to say that any banking 
bill seems to have a dreary prospect in the Banking and 
Currency Committee when it comes to the matter of secur- 
ing a consensus of opinion upon it. 

Mr. Glass. But we have reported a bill from this com- 
mittee. 

Mr. Dawes. I do not know what the chances of that bill 
are. 

Mr. Weeks. Mr. Chairman, I move that the thanks of 
the committee be extended to Mr. Dawes. 

(The motion was unanimously carried.) 



THE BANKING POWER OF THE MIDDLE 

WEST: WHY CHICAGO IS GREAT AS 

A BANKING CENTER 

(The World Today, September, 1909) 
The growth of the banking power of the Middle West 
since 1890 is remarkable and does much to explain the 
increase in the banking power and prestige of the city of 
Chicago. There is a growing tendency on the part of coun- 
try banks of this section to keep a larger portion of their 
reserve balances with Chicago banks. Consequently the 
growth of this power in the city has been further acceler- 
ated by the natural attraction which the greater banking 
power of Chicago creates for the keeping of this larger 
proportion of reserve deposits in the city, the natural re- 
serve center of this section. 

The recent consolidations of banking interests in Chi- 
cago will have a tendency to increase the amount of re- 
serve banking done by country banks here, for, as our 
banks come to approximate in size some of the leading 
banks in New York, and conditions become more equal in 
other regards, the accessibility of Chicago, and the greater 
convenience with which business can be transacted near 
home, becomes to a larger degree the determining element 
in the placing of such balances on the part of the country 
banks of the Middle West. 

In conjunction with my secretary, Mr. B. F. Blye, for- 
merly of the Office of the Comptroller of Currency, I have 
been making an investigation as to this growth in banking 
power in the Middle West as well as in the United States 



412 ESSAYS AND SPEECHES 

as a whole. The banking power is made up of the capital 
stock, surplus, undivided profits, individual deposits, and, 
in the case of the national banks, the circulation outstand- 
ing and government deposits. For the United States this 
amounted in 1890 to $5,150,000,000; in 1900 to $10,685,- 
000,000 and in 1908 to $17,642,000,000. 

As indicating the banking power of the Middle West, I 
have included returns from the States of Ohio, Indiana, 
Illinois, Tennessee, Kentucky, Michigan, Wisconsin, Min- 
nesota, North Dakota, South Dakota, Iowa, Kansas, 
Nebraska, Missouri, Oklahoma, and Arkansas, — sixteen 
States, — all of which lie wholly or in part within a circle 
with a radius of approximately five hundred miles, with 
the city of Chicago as a center. These States have an area 
of a little less than one third that of the United States, 
exclusive of Alaska and the island possessions. Their popu- 
lation, according to the Census of 1900, forms about forty- 
two per cent of the total of the United States. 

In 1890, the banking power of these States amounted 
to $1,429,319,000, or 27.75 per cent of the entire banking 
power of the United States. In 1900, it amounted to 
$2,278,617,000, or 21.3 per cent of the total for the entire 
country. In 1908, the banking power of this section 
amounted to $4,988,244,000, being 28.32 per cent of that 
for the entire United States. 

The following comparison seems to me of great signifi- 
cance as indicating the recent rapid growth in the wealth 
of the agricultural sections of the United States, as well 
as indicating the foundation for the general statements 
made in the beginning of this article. In 1900, the per- 
centage of increase in the banking power of the States 
named above over 1890 was 59.41, the increase in the total 
banking power of the United States for the same period 
being 107.47 per cent. The gain in percentage of the 



BANKING POWER OF MIDDLE WEST 413 

growth of these Middle States in 1908 over 1890 was 
249.05 per cent, while the gain for the United States as a 
whole in banking power for 1908 over 1890 was 242.58 per 
cent. However, the gain in the banking power of the 
Middle West for the last eight years — 1908 over 1900 — 
was at the rate of 118.96 per cent, whereas the gain in the 
banking power of the United States as a whole, as com- 
pared with this, was 65.11 per cent. 

The volume of clearings of banks in the States enumer- 
ated is as follows: For 1890, $8,960,000,000; for 1900, $14,- 
331,000,000; and for 1908, $25,188,000,000; showing a 
percentage of gain in clearings for 1900 over 1890 of 60.5 
per cent, for 1908 over 1890 of 181.12 per cent, and for 
1908 over 1900 of 75.76 per cent. 

A table is inserted herewith showing the volume of 
the various items making up the banking power of the 
States before named for the years 1890, 1900, and 1908, 
together with their percentages of increase in such items; 
also a table showing the volume of banking power by 
classes of banks, which I think will be found most in- 
structive. 



Table showing the various items making up the banking power for 
1890, 1900, and 1908, and the percentages of increases for the dif- 
ferent periods 





1890 


1900 


1908 


Per cent 

of gain 

of 1900 

over 

1890 


Per cent 

of gain 

of 1908 

over 

1890 


Per cent 

of gain 

of 1908 

over 

1900 




$360,984 
81,771 
40,901 
895,080 
12,748 
37,835 


$361,447 
96,744 
50,720 

1,656,835 
26,624 
86,247 


$647,270 
266,260 
121,156 

3,683,479 

48,702 

221,156 


0.13 

18.51 

25.00 

85.03 

116.66 

132.43 


79.02 
228.39 
202.5 
311.51 
300.00 
497.29 


79.2 




177.09 


Undivided profits .... 
Individual deposits . . . 
Governm't deposits. . . 


142. 
122.40 
84.62 
156.98 






Total 


$1,429,319 


$2,278,617 


$4,988,244 


59.41 


249.05 


118.96 



414 



ESSAYS AND SPEECHES 



Table showing the banking power of the Middle West by classes of 
banks and the percentage of increase for these periods 



Class of Banks 


1890 


1900 


1908 


Per cent 
of gain 
of 1900 
over 1890 


Per cent 
of gain 
of 1908 

over 1890 


Per cent 

of gain 

of 1908 

over 1900 


National 


$818,798 
334,964 

16,611 
117,589 
141,357 


$1,192,951 
845,252 

11,544 

88,351 
140,519 


$2,324,430 
2,075,823 

211,399 
123,408 
253,185 


45.72 
152.99 

45.45 
32.95 
.006 


184.11 
521.26 

1,218.75 
.051 
80.71 


94.966 
145.56 


Loan & Trust 
Co 


1,818.18 


Private 

Savings 


39.77 
80.71 


Total.... 


$1,429,319 


$2,278,617 


$4,988,244 


59.41 


249.05 


118.96 



Table showing the banking power by States of the Middle West 
for 1890, 1900, and 1908 and percentages of increases for those 
periods 



States 


1890 


1900 


1908 


Per cent of 

gain of 

1900 over 

1890 


Per cent of 

gain of 

1908 over 

1890 


Per cent of 

gain of 

1908 over 

1900 


Arkansas 

Kentucky 

Tennessee 

Ohio 


$6,841 

92,151 

45,824 

221,824 

75,451 

216,276 

120,647 

81,610 

97,287 

100,759 

168,474 

8,672 

14,150 

103,957 

73,178 

818 


$11,475 

108,642 

48,840 

406,908 

133,350 

485,724 

201,722 

148,884 

123,679 

172,843 

221,231 

15,325 

20,306 

84,461 

81,651 

13,576 


$36,262 

179,806 

134,249 

861,052 

325,570 

1,012,468 

368,138 

272,148 

289,506 

397,011 

517,135 

62,793 

71,683 

181,662 

188,070 

90,696 


83.33 
17.39 
6.66 
83.71 
77.33 
124.54 
67.50 
82.71 
26.80 
72.00 
31.54 
87.50 
42.85 
22.62 
10.96 
1,559.66 


500.00 
94.56 
197.77 
289.59 
333.33 
368.52 
206.66 
235.80 
289.28 
297.00 
207.74 
675.00 
407.14 
75.73 
157.53 
10,987.53 


227.27 

65.74 

179.17 

112.07 


Indiana 

Illinois 

Michigan 

Wisconsin 

Minnesota .... 


144.36 
108.67 
83.08 
83.79 
134.96 
130.81 


Missouri 

North Dakota. 
South Dakota . 

Nebraska 

Kansas 

Oklahoma 


133.94 
313.33 
255.00 
115.48 
132.09 
592.30 


Total... 


$1,429,319 


$2,278,617 


$4,988,244 


59.41 


249.05 


118.96 



In the table showing the banking power by States a num- 
ber of interesting instances develop, as for example, the 
gain in the State of Oklahoma for 1908 over 1900 is found 
to be 592.2 per cent. The gain in this State in banking 
power for 1908, as compared with 1890, a period of eighteen 
years, is 10,987.53 per cent. 



BANKING POWER OF MIDDLE WEST 415 

A table is appended showing the banking power in the 
States mentioned above for the years 1890, 1900, and 1908, 
and the percentages of increase during those periods. 

It is well to say in connection with those figures that for 
1890 the reports received from state banks, loan and trust 
companies, private banks and savings banks were not 
complete and in many cases careful estimates were made 
based on the few reports received. For 1900 and 1908, 
however, the returns made to the Comptroller of the Cur- 
rency were more nearly complete, and the figures given for 
those years are much more exact. 



THE END 



INDEX 



Advertisements of investment op- 
portunities, untrustworthiness of, 
20, 22. 

Agreements in restraint of trade, 
29; may keep competition alive, 
33; all such, criminal under Sher- 
man law, 38; some, of public ben- 
efit, 42, 43, 51; if of public bene- 
fit, or not publicly detrimental, 
should be permitted, 52; "rule of 
reason" introduced in interpre- 
tation of, 53Jf.; uncertainty as to 
reasonableness of, a source of 
danger, 53, 54, 55, 70, 71; num- 
bers of in U.S., compared to 
those in Germany, 58; radicals 
propose to abolish distinction be- 
tween reasonable and unreasona- 
ble, 58, 59, 69, 72; proposed busi- 
ness tribunal to deal with, 61- 
63. 

Aguinaldo, Emilio, "a corrupt 
scoundrel," 105, 106. 

Aldrich, Nelson W., 401. 

Aldrich bill, address on, before 
House Committee on Banking 
and Currency (1908), 330-410; 
general principles of, approved, 
332, 377; reserve feature of, dis- 
cussed, 337 ff. ; misrepresentation 
of, 337, 338, 405, 407; one serious 
defect in, 367; should be amended 
to obviate that defect, 367, 374; 
other desirable amendments to, 
376, 405; an extremely conserva- 
tive measure, 389; a "finished 
product" as it came from the 
Senate? 404; opposition of banks 



and commercial bodies to, 405, 
406, 407, 408. 

Aldrich plan for National Reserve 
Association, object of, 326-328. 

Allen, Charles H., 296. 

American Banker, 302. 

American Bankers' Association, 
not reliable guides in financial 
legislation, 388, 389. 

American Bankers' Association bill, 
377, 378. 

American business man, character- 
ized, 50; his object, 51, 52. 

American Sugar Refining Co., opin- 
ion of N.Y. Court of Appeals in 
State vs., 30. 

Asset currency, discussed, 299 ff.; 
why advocated, 300; possible 
need of, obviated by law of 
March 14, 1900, 300; meaning of 
term, 301; taxation of, how to be 
adjusted, 301-303; proposed first 
lien of, and depositors' interests, 
304/.; in Canada, 307, 311. 

Baker, George F., 395, 396. 

Bank-asset notes, issuance of, dis- 
approved, 259, 260. 

Bank clearings in U.S., changes in, 
in autumn of 1914, 122. 

Bank-credit money, should it dis- 
place government-credit mon- 
ey? 196 ff.; great volume of, in 
U.S., 219; its automatic expan- 
sion and contraction, 258. 

Bank-deposit credits, actual cur- 
rency the foundation of, 118. 

Bank deposits, insurance of, 95-99; 



418 



INDEX 



letters of C. G. D. to Gov. Hoch 
and Senator Hopkins, on, 97-99; 
amount of, in U.S., 303, 304; 
ratio of circulation to, 304. 

Bank-note currency, inelasticity of, 
195, 219/.; is extension of, de- 
sirable ? 196 ff. ; recommended 
changes of law governing issue of 
(1898), 221; need of provision for 
emergency circulation, 248 /.; 
such need would be only tempo- 
rary, 250; comptroller urges au- 
thorization of issuance of addi- 
tional, 251, 252, and reduction 
or abolition of tax on, 252; repeal 
of prohibition of increase of un- 
der certain conditions, urged, 
260; various bills for reform of, 
discussed, 312 /.; as reserve, 367, 
368, 370/.; in state banks, 369 
ff. ; not enough of, on hand, to fill 
orders, in 1893-94, 401, 402; rea- 
son for shortage of, 402; consid- 
erations which govern amount 
of, in existence, 402, 403. And 
see Asset currency, Depositors, 
Emergency Circulation, National 
banks (insolvent), Reserves. 

Bank of England, 201, 219, 220. 

Bank of U.S., controversy between 
Pres. Jackson and, 129, 132, 136, 
137; distinction between pro- 
posed National Reserve Associa- 
tion and, 326, 327. 

Bank reserves, and emergency cir- 
culation under Aldrich bill, 392/. 

Banking and Currency, House Com- 
mittee on, author's address be- 
fore, on Aldrich bill, 330/.; ad- 
verse opinion of members of, on 
that bill, 399, 400, 410. 

Banking conditions, improvement 
in, in U.S., 117/. 

Banking laws of U.S., criticism of, 
suggested extension of note is- 



sues of banks, 198 /.; probable 
effect of such change, to stimu- 
late tendency toward centraliza- 
tion of capital, 214, and to in- 
crease banking business in West 
and South, 214, 215; further dis- 
cussion of proposed changes in, 
as bearing upon rights of deposi- 
tors and note-holders respec- 
tively, 216/.; desirable changes 
in, 299-318. And see Aldrich bill. 

Banking system of U.S., weakness 
of, 345, 346. 

Banking systems, American and 
European, compared, 315, 316. 

Banks in U.S., amount of deposits 
in, 303, 304; their probable pur- 
chases of bonds under Aldrich 
bill, 392; amount of bonds avail- 
able for purchase by, under its 
provisions, 400, 401; legislation 
harmful to, is harmful to all the 
people, 397. And see Country 
banks, National banks, State 
banks. 

Banks, to carry on international 
and intercolonial business, incor- 
poration of, essential, 243, 245, 
247, 264 /., 295, 297, 298. 

Banks in New York City, action of, 
in war crisis of 1914, 120, 121; 
and reserves of country banks, 
346, 347, 348. 

Benton, Thomas H., 154, 163, 164, 
172, 173, 179, 180, 181, 183, 184. 

Blaine, James G., 243. 

Blye, B. F., 411. 

Bonds, purchase of, by banks, under 
Aldrich bill, 39 /.; amount of, 
available for such purchase, 400, 
401. 

Bonds, government, required hold- 
ing of, by banks, and the Aldrich 
bill, 342, 343, 344; fluctuations 
in price of, largely determined 



INDEX 



419 



amount of bank-note currency in 
circulation, 402, 403. 

Branch banking, 314/.; time not 
ripe for in U.S., 317. And see 
Domestic branch banking, For- 
eign and colonial branch banking. 

Brokers, loans by, for national 
banks, 347, 348. 

Brosius, M., 277. 

Bryan, W. J., and the Philippine 
question in 1900, 104, 107, 111. 

Burlington and Missouri River Ry. 
in Nebraska, 144 ff. 

Burton, Theodore E., 330. 

Business conditions, recurring cy- 
cle of, 75; in autumn of 1914, 
116/. 

Business tribunal, to deal with 
agreements in restraint of trade, 
61-63. 

Byllesby, H. M., address at ban- 
quet to, 65 ff. 

Campaign of 1900, issues of, 100- 
115. 

Canada, note-issue system of, 216, 
217, 3.07, 311, 312, 314, 315; 
banking system of, 381. 

Cannon, Henry W., Comptroller of 
Currency, quoted, on panics, 77. 

Capital, combinations of, 25 ff.; 
centralization of, to be avoided 
rather than fostered, 214, 316. 

Capital stock of corporations. See 
Stock. 

Capitalists, and small investors, 
19 J*.; power and influence of, 
66, 67, 68; influence of, over prop- 
erty of others depends on wisdom 
and justice of their action, 66. 

Capitalization, and the govern- 
ment, 90, 91. 

Carnegie, Andrew, 381. 

Cartels. See Agreements in re- 
straint of trade. 



Cash-reserve of national banks, 
enforced strengthening of, by 
law, recommended, 291/ 

Central Trust Co., of Illinois, 330 

ff- 

Charters, of national banks, un- 
certainty as to second extension 
of, 270-272. 

Checks and balances, system of, 
essential to success of organiza- 
tions of all sorts, 321, 322. 

Chicago, controversy concerning 
Federal Reserve bank in, 131; 
as a banking centre, 411/ 

Chicago, Burlington & Quincy R. 
R. Co., and the Northern Securi- 
ties case, 36, 37, 45-47; financial 
operations of, as related to ques- 
tion of freight rates in Nebraska, 
144 ff.; classification of freight 
by, 156, 157; discrimination in 
rates by, 160, 161, 168/.; reduc- 
tion of rates in Nebraska by, 
would not reduce earnings, 177. 

Chicago Tribune, quoted, 404, 405. 

Clearing-house certificates, system 
of, 118/.; in 1907, 334, 359, 360. 

Clearing-houses, resolutions of, on 
reserve features of Aldrich bill, 
337, 338, 350/., 383, 407. 

Colonies of U.S., pressing need of, 
for proper banking facilities, 
242/, 295. 

Commercial paper, as basis of se- 
curity for emergency currency 
under Aldrich bill, 376. 

Competition, as remedy for abuses 
growing out of combinations of 
capital, 27; unrestrained and un- 
regulated, evils of, 33 /.; unre- 
stricted, relation of, to the Sher- 
man Law, 57. 

Comptroller of the Currency, re- 
port of, 1898, 195-247; 1899, 
248-269; 1900, 270-298. 



420 



INDEX 



Concentration, tendency toward, 
in business in U.S., 25; effect of, 
on public opinion, 25. 

Congress, proper source of legisla- 
tion to regulate trusts, 30, 31. 

Corporation Reform, 80-94. 

Corporations, various kinds of crit- 
icism of, distinguished, 80, 81; 
defined, 81; inherently, contracts 
among men, 81; "fair," and "un- 
fair," examples of, 82/.; watered 
stock in, 86 /.; proper role of 
government in regulation of, 90; 
proposed reform of, should not 
interfere with capitalization, 92; 
nature of present problems relat- 
ing to, 92. And see Agreements 
in restraint of trade, Banks, Na- 
tional banks. 

Corporations, competing, combina- 
tions of, 25/.; objects of, 26, 27; 
causes of, 27; remedy for abuses 
of, 27. And see Trusts. 

Cortelyou, George B., 345. 

Country bankers, relation of re- 
serve held by, to their deposit 
liabilities, 335; do business on 
balances due from reserve agents, 
345, 346; how affected by Aldrich 
bill, 396, 397. 

Courage, true, in statesmanship, 
51. 

Crawford, W. T., 330, 401. 

Credit, the foundation of the great- 
er part of circulation medium, 
118; how protected by banks and 
bankers, 118; the clearing-house 
certificate system, 118/.; action 
of New York banks to protect in 
1914, 120, 121. 

Credit-currency, change in senti- 
ment of bankers toward, 388, 
389. And see Greenbacks. 

Criticism, of corporations, etc., 
harmful in many cases, 80, 81. 



Crop-moving season, requirements 
of currency during; and the Al- 
drich bill, 339, 384 ff. 

Currency, as a foundation for bank- 
deposit credits, 118; demand, dis- 
proportion between, and gold in 
Treasury, 186, 195; plans to les- 
sen this condition, 187, 188, 196. 
And see Bank-note currency, 
Emergency circulation, Emer- 
gency currency. 

Currency reform, outlook for (1899), 
186-192; various plans of, after 
election of 1896, 187; McKinley's 
recommendations, 187, 188; 
adoption of gold standard impor- 
tant feature of, 188, 192; need of 
legislation to secure, 332/.; in- 
ability of "financial doctors" to 
give concerning, 332, 333; vari- 
ous plans for (in 1908), 333. 

Dawes, Henry M., 193. 

Dawes, Rufus Fearing, his charac- 
ter and death, 1-6; his notes on 
various subjects, 7-9. 

Dawes, Rufus R., his address on 
the Army of the Potomac, 10-16; 
his character, 17; his career and 
death, 18. 

Demagogues, power of, and its 
source, 72, 73. 

Democratic National Convention 
of 1900, and free coinage, 102. 

Democratic party, the, put for- 
ward "imperialism" as para- 
mount issue, in 1900, 100; and 
the free-coinage issue in 1900, 
100/.; menace of success of, 102; 
attitude of, on Philippine ques- 
tion, 107/.; 100. 

Denby, Charles, 105. 

Depositors, in National banks, pro- 
tection of, the special duty of 
Comptroller, 195*, injustice and 



INDEX 



421 



danger of suggested, preference 
of note-holder over, 198 ff.; or- 
dinary relations of, with their 
banks, 199, 200; losses of, due to 
insolvency of banks, under pres- 
ent (1898) law, and under pro- 
posed legislation for extension of 
note-holdings (with tables), 202 
ff.; no preference of note-holders 
over, in European banking sys- 
tems, 216, 217; their interests 
how endangered by creation of 
asset-currency, 304 ff. 

Dewey, George, 106. 

Domestic branch banking, legaliz- 
ing of, recommended, 240-242. 

Durey, Cyrus, 330. 

Eckels, J. H., 276. 

"Elasticity" of bank-note cur- 
rency, 195, 219/.; 221, 250, 251, 
256, 308, 312. And see Emergen- 
cy circulation. 

Emergency circulation, need of 
provision for, 248 ff., 309 ff., 
313; such need would be only 
temporary, 250; problem of en- 
acting such legislation a difficult 
one, and why, 251; comptroller's 
recommendations on that sub- 
ject, 251, 252, 253, 258; under 
present (1899) law, 257. 

Emergency circulation, under Al- 
drich bill, 356, 357, 363, 364, 
365, 375; banks required to re- 
deem, in lawful money, 366; pro- 
vision of bill concerning, should 
be amended, 367, 374, 379; com- 
mercial paper as basis of secur- 
ity for, 376; urgent need of, to 
mitigate evils of panics, 386; im- 
mediate need of, unlikely (1908), 
387; how to be issued, 392, 393; 
how soon could it be made avail- 
able? 403, 404. 



"Endless chain," the, 186; how to 
be done away with, 191. 

England, "uncovered" note-issues 
in, 219, 220. 

Erie, R. R. Co., 89. 

European systems of note-issues, 
compared with that of U.S., 215, 
216;comparativeelasticityof,219. 

European. War, the, and its prob- 
able effect on business in U.S., 
116/. 

Examiners. See National bank ex- 



Federal Reserve banks, described, 
129; their purpose, and probable 
fate, 129, 130; imperiled by dual 
trusteeship provided for by Fed- 
eral Reserve law, 131, 138; may 
be put in position of bank of 
U.S. in 1837, 132; future rela- 
tions of U.S. government with, 
132 ff.\ possible clamor against, 
134, 135; control of, must be 
taken from their competitors, 
137, 138. 

Federal Reserve Board, 132; pos- 
sible relation of Secretary of 
Treasury to, 134, 139. 

Federal Reserve law, dangers of, 
328-140; may cause repetition 
of controversy between Presi- 
dent Jackson and Bank of U.S., 
129; provides for dual trustee- 
ship, etc., 131, 138; necessary 
amendments of, 137 ff. 

Filipinos, nature and character of, 
106; incapable of self-govern- 
ment, 106, 107, 109, 110. 

Financial reform, legislation to se- 
cure, should be urged while pub- 
lic sentiment is aroused by a re- 
cent panic, 390, 402. 

Finch, Francis M., Just. N. Y. 
C. A., quoted, 29, 30. 



422 



INDEX 



Foreign and colonial branch bank- 
ing, great importance of legisla- 
tion to be enacted concerning, 
242/., 264/. 

Foreign trade, of little importance 
in domestic prosperity, 123, 124. 

Forgan, James B., 67, 345, 349, 
359, 361, 390. 

Fowler, Charles N., colloquies of 
author with, 351-356, 368-375, 
408-410; 330, 346, 377, 378, 380, 
387, 388, 389, 402. 

Fowler, W. J., 368. 

Fowler bill, criticized, 312. 

Fowler plan of banking reform, 377, 
378. 

Free coinage of silver, as an issue in 
1900, 100/ 

Freight, classification of, by C. B. 
& Q. in "Western" territory, 
157-159. 

Freight rates. See Nebraska. 

Gage, Lyman J., 313. 

Gage bill, 313. 

"Get-rich-quick" plans, 19, 22, 23. 

Gillespie, Oscar W., 330, 346, 347, 
362, 400. 

Glass, Carter, 390, 410. 

Gold reserve, proposed trust fund 
to protect, 188, 190, 191, 192; 
should be kept apart from gen- 
eral fund of Treasury, 189; con- 
dition of, in 1893-94, 189, 190, 
299, 300; protected by law of 
March, 1900, 300. 

Gold standard, established by Mc- 
Kinley administration, 101 ; adop- 
tion of, recommended, 188. 

Government-credit money, should 
it be replaced by bank-credit 
money? 196/. 

Great Northern R. R. Co., and the 
Northern Securities case, 36, 37, 
45-47, 59. 



Greenbacks, advocates of "asset 
currency" favored retirement of 
large part of, 300. 

Hamilton, Alexander, 314, 380. 
Harden, Edward W., 264, 265, 297. 
Harrison, Benjamin, Pres. of U.S., 

243. 
Hastings, Att'y-Gen. of Nebraska, 

165, 182. 
Hawaii, business conditions in, 246, 

247. 
Hay, C. C, 302. 
Hayes, E. A., 330. 
Hepburn, A. B., 276. 
Hill, James J., 49. 
Hoch, E. W., Governor of Kansas, 

letter of C. G. D. to, 97. 
Hopkins, A. J., letter of C. G. D. 

to, 98. 

"Imperialism," inaptness of term, 
100; declared by Democrats to 
be paramount issue in 1900, 100; 
And see Philippine Question. 

Independent Treasury system of 
banking, 364, 378. 

Individual, government based on 
rights of, 29. 

Initiative and referendum, dangers 
of, 322/ 

Insurance of bank deposits. See 
Bank deposits. 

International American Congress 
of 1890, 243. 

Interstate Commerce Commission, 
quoted, 31. 

Interstate Commerce Law, infrac- 
tions of, 31; proper modifications 
of, 31. 

Jackson, Andrew, President of 

U.S., 129, 137. 
James, Ollie M., 330. 
Justice, Department of, and the 



INDEX 



423 



Northern Securities case, 36, 37, 
45-47; has too much latitude and 
discretion under Sherman Law, 
44; appearance of favoritism in 
action of, 44, 45; wide discretion 
of, under test of reasonableness, 
55, 71, 72, 73; attitude of (1911), 
threatening to business, 57. 

Kirkman, M. M., his Basis of Rail- 
way Rates, quoted, 39. 
Knox, John Jay, 345. 

Lacey, E. S., 276. 

LaFollette, R. M., 405. 

Laughlin, J. Laurence, 324. 

"Lawful money," emergency cur- 
rency issued under Aldrich bill 
to be redeemed in, 366/., 393/. 

Lincoln, Abraham, 114, 322. 

Live-and-let-live policy, 33. 

Loans, by national banks, limita- 
tion of, 223 ff.; present (1898) 
provision relating to limitation 
of, frequently violated, 224; rea- 
sons for defective working of that 
provision, 225, 226; its effect 
varies with the size of communi- 
ties in which banks are situated, 
226, 227; largest liberty in, dic- 
tated by public policy, 228; lack 
of penalty for exceeding limita- 
tion of, embarrasses Comptroller, 
228; suggested changes in pro- 
vision for limitation of, 228, 229, 
261, 262, 282-290. And see 
National banks, directors of. 

Loans by brokers for national banks, 
amount of, 347, 348. 

Long-haul theory, in freight rates, 
174, 178. 

McAdoo, William G., 139. 
McCleary bill, 313. 
McHenry, John G., 330. 



McKinley, William, his plan for 
settlement of Philippine ques- 
tion, 112, 113; and the Spanish 
War, 115; recommendation as 
to currency legislation in early 
messages, 187, 188, 190, 191, 
192; 94, 324. 

Massachusetts Gas Commission, 
law creating, criticized, 90, 91. 

Middle West, growth of banking 
power of, 411-415; States in- 
cluded in, 412; comparative gain 
in banking power of, and of the 
whole country, 413; statistical 
tables, 413, 414. 

Mill, John Stuart, 118. 

Monetary system of U.S., defects 
of, 186; inherent weakness of, 
exposed by panic of 1893, 299. 

Monopolies, right of government 
to regulate, 29. 

Monroe Doctrine, and the Philip- 
pine question, 111. 

Morgan, J. P., 66, 380. 

Muck-raking magazines, 49, 50, 67. 

Mugwump press, and the cam- 
paign of 1900, 103. 

National-Bank Examiners, im- 
portance of work of, 222; proper 
qualifications of, 222; employ- 
ment of, by banks, forbidden, 
222; work of, commended, 262, 
263; special examinations by, 263; 
recommendation as to fees of, 295. 

National bank-notes. See Bank- 
note currency. 

National banks, under Federal Re- 
serve law, 129, 130; possible 
clash between Federal Reserve 
banks and, 132, 133; most im- 
portant function of, 197, 218, 
303; relation between note-issue 
and general business of, 201; 
should Congress authorize for- 



424 



INDEX 



eign or colonial branches of ? 243; 
figures concerning possible profits 
of, with increased circulation, 
and reduced taxation thereon, 
253 ff.; authorization of, with 
$25,000 capital, in small towns, 
recommended, 262; expiration 
and second extension of charters 
of, 270-272; and asset currency, 
301 ff.; and reserve features of 
Aldrich bill, 337 ff., 349, 350; 
redemption of emergency cur- 
rency under Aldrich bill by, in 
lawful money, 360, 367. And see 
Cash reserve, Country banks, 
Loans, Reserve banks. 

National banks, directors and offi- 
cers of, Comptroller urges re- 
strictions on loans to, 272 ff.; 
failures due to such loans, 273; 
details concerning their number 
and amount, 273-275; recom- 
mendations of previous Comp- 
trollers, 276; Brosius bill con- 
cerning, 277 ff.; 377. 

National banks, insolvent, liens of 
note-holders and depositors, re- 
spectively, on assets of, 198 ff.; 
preference of former under pro- 
posed changes of law (1898), not 
justified, 198 ff., 201 ff. (and 
tables); statistics concerning li- 
quidation of, 204 ff. ; distribution 
of assets of, 230, 231; excessive 
expense of receiverships of, 232, 
267; process of ascertaining de- 
ficiency in assets of, 238-240; 
particulars concerning, in 1899, 
266-268. 

National banks, stockholders in, 
assessments upon, to cover defi- 
ciencies in assets, not unchange- 
able, 233 Jf.; examples where re- 
vision was necessary, 235, 237, 
269; opinion of Supreme Court 



of U.S. on separate liability of, 
235, 236; Comptroller's relation 
to, 236; action of Comptroller in 
making second assessment upon, 
sustained, 269. 

National Reserve Association, not 
a central bank, 326-329; its pur- 
poses, 327, 328; benefits to be 
secured by, 328, 329. 

Nebraska, local freight rates in, 
discussed before Railroad Com- 
mittee of Nebraska Senate, 141 
ff.; effect of reduction of, 143, 
144; discussed before Board of 
Transportation, 154< ff.; discrimi- 
nation against State shown by, 
160, 161, 168 ff., 174, 175; reduc- 
tion of, would not reduce earn- 
ings of road, 177. 

New York City, undue accumula- 
tion of funds at, and its effect, 
348, 349. 

New York Clearing House, trans- 
actions of, 78. 

Northern Pacific R. R. Co., and 
the Northern Securities case, 36, 
37, 45-47, 59. 

Northern Securities case, 36, 37, 
45-47. 

Northern Securities Co., dissolu- 
tion of, 36, 59. 

Otis, Elwell S., 106. 

Panic of 1857, 364. 

Panic of 1893, some particulars 
concerning, 249, 250, 299, 300, 
332. 

Panic of 1907, 333 ff. 

Panics, periodicity of, 75, 308, 309, 
310, 387; twenty-year-period, 
greater severity of, 75; various, 
considered and classified, 75-77; 
need of provision for emergency 
circulation to lessen effects of, 



INDEX 



425 



248 ff., 386; cannot be avoided, 
308, 386; general considerations 
concerning, 402. 

Peace, economic value of, 122. 

Pennsylvania R. R. Co., 89. 

Philippine Islands, conditions in, 
104/. 

Philippine question, in the cam- 
paign of 1900, 103 /.; McKin- 
ley's plan for settlement of, 1 12, 
113. And see Filipinos. 

Popular will, to be enforced, should 
be deliberately formed, not tem- 
porary, 319, 320. 

Porto Rico, situation of trade and 
finance in, 245, 246. 

Power, relation of centralization of, 
to diffusion of, 128/. 

Prices, relation of, to business com- 
binations, 26. 

Prince, George W., colloquies of 
author with, 339-342, 403-404; 
330, 367, 384, 398, 406. 

Prosperity, era of, impending for 
U.S., 117, 122; domestic, for- 
eign trade has little bearing on, 
123. 

Public utility corporation, 70. 

Publicity, purpose of, 92, 93. 

Pujo, A. P., 330, 354, 386. 

Radical method of dealing with 
trust problem, 58, 59, 69. 

Radicals, and conservatives, 324, 
325. 

Railway employees, brotherhood 
of, 321. 

"Reason, rule of," in contrasts in 
restraint of trade, 53 ff. 

"Reasonableness," uncertainty as 
to definition of, 53, 54, 55, 70, 71. 

Recall of public officers, condemned, 
322-324. 

Receivers. See National banks, in- 
solvent. 



Reed, Thomas B., quoted, 87, 93. 

Referendum. See Initiative. 

Republican party, and the Philip- 
pine question, in 1900, 111, 112, 
113, 114, 115; unanimity of, on 
currency question (1899), 186. 

"Reserve banks," strain upon, in 
financial crises, 291, 292, 293, 
334; means by which they are 
able to pay the high rate of in- 
terest which attracts deposits 
from country banks, 291; experi- 
ence of 1899, 291, 292; purpose 
of issue of clearing-house certifi- 
cates by, in 1907, 334, 335; and 
country bank, 345. 

Reserves, legal, of banks, as affect- 
ed by Aldrich bill, 337/.; rela- 
tion of, to credits, 356; various 
remedies for weakness of bank- 
ing system due to, 359, 360, 361. 

Restraint of trade, agreements or 
combinations in. See Agreements 
in restraint of trade. 

Revenue, deficiency in, developed 
by panic of 1893, 299, 300. 

Reynolds, Earle M., 131. 

Reynolds, George M., 131. 

Ridgely, Comptroller, recommends 
central bank, 359, 360, 371. 

Roosevelt, Theodore, President of 
U.S., and Corporation reform, 
94. 

Root, Elihu, 296. 

Rufus F. Dawes Hotel, 193, 194. 

Saturday Evening Post, quoted, 37. 

Schurman, J. G., 105. 

Self-government, incapacity of Fili- 
pinos for, 106, 107; discussion of 
man's inherent right to, 108 /. 

Seller, of stocks, and the small in- 
vestor, 19, 20. 

Senate of U.S., quality of present 
membership of, 73. 



426 



INDEX 



Sherman Anti-Trust Law, status 
of, in 1906, 33-40; principal ob- 
jections to, 34, 35, 43/.; makes 
all agreements in restraint of 
trade criminal, 38, 42; practi- 
cally a dead letter from its pas- 
sage (1890) until 1905 or later, 
38, 39, 48; amendment of, desir- 
able, 39, 48, 52; severely criti- 
cized, 42 ff.; uncertainty as to 
what acts are criminal under, 43, 
44; operation of, in Northern Se- 
curities case, 45-47; held by U.S. 
Supreme Court to apply only to 
contracts which unnecessarily 
and unduly restrict competition, 
or unreasonably restrain inter- 
state trade, 53; underlying as- 
sumption of, 57; nature of amend- 
ment of, recommended by radi- 
cals, 58, 59; how to be dealt 
with under Taft method of deal- 
ing with trust problem, 59; its 
inefficiency and inutility demon- 
strated, GO; effect of, if literally 
enforced, 69; proper amendment 
of, one of the greatest questions 
for business men, 73. 

Silver, free coinage of. See Free 
coinage. 

Small investor, the, at a disadvan- 
tage compared with the capital- 
ist, 19 J*.; exposed to "get-rich- 
quick" plans, 19; should take 
little on faith, 20, 21, 22; general 
advice to, 24. 

South America, need of proper 
banking facilities for trade with, 
242 ff. 

Standard Oil Co., 59, 60, 89. 

State banks, national bank-notes 
held as reserve by, 369/.; 133. 

Stevens Maximum Rate bill, 141 ff. 

Stock, in modern corporations, 87; 
significance of changes in market 



value of, 87, 88; various objects 
of manipulation of, 88, 89. 

Stock, watered, 86, 87, 88, 89. 

Stock exchanges, manipulation of 
values on, 88. 

Sugar Trust. See American Sugar 
Refining Co. 

Supreme Court of U.S., decision of, 
in Northern Securities case, 36, 
37, 45-47; later, introduces "rule 
of reason" in construing Sher- 
man law, 53; opinion of, as to 
method of fixing separate liabil- 
ity of stockholders in national 
banks, 235, 236. 

Tables giving details of liquidation 
of, 195; insolvent National banks 
in U.S., analyzed, 204-212 (ta- 
bles follow 221). 

Taft administration, policy of, in 
trust prosecutions, 59, 60. 

Taney, Roger B., quoted, 135, 136; 
134. 

Taxation, of bank circulation, etc., 
252/., 256, 258, 313, 314; of pro- 
posed asset currency, 301, 302, 
303. 

Tillman, B. R., 114. 

Trade, restraint of. See Agreements 
in restraint of trade, Trade agree- 
ments. 

Trade agreements, not necessarily 
criminal, 34, 42, 43; great num- 
ber of, in U.S., 58. And see Agree- 
ments in restraint of trade. 

Treasury, Secretary of the, rela- 
tion of to Federal Reserve banks, 
132 ff.; possible effect of his au- 
thority to deposit government 
funds in Federal Reserve banks, 
133, 134; power of, must be cur- 
tailed, 139, 140. 

Treasury of the U.S., position of, in 
1837, and in 1908, contrasted, 364. 



INDEX 



427 



Trust problem, the, discussed, 57- 
64; two methods of dealing with, 
58 Jf.; policy of Taft administra- 
tion concerning, 60; proposed 
legislation to deal with, 61 ff. 

Trusts, human nature primarily re- 
sponsible for, 27; why a political 
question, 27, 28; legislation neces- 
sary to regulate, 28; dissolution 
of, the alternative, 29; right of 
government to control, 29. And 
see Trust problem. 

United States, anomalous position 
of, in the East, without sover- 
eignty of Philippines, 111; about 
to enter on an era of great pros- 
perity (1914), 117, 122; improved 
banking conditions in, 117, 118, 
123; commercial and industrial 
independence of, 124; system of 
note, issues in, compared with 
European systems, 215; 216; 
merchants of, handicapped by 
lack of proper banking facilities 
for colonial and foreign trade, 
242/., 264 #., 295, 296; banking 



system of, greatest in the world, 
315, 317, 381, 382; business in- 
terests of, require remedial finan- 
cial legislation, 336, 337; unique 
banking conditions in, 381, 382. 

United States Steel Corp., case of, 
considered, 54, 55, 71, 72, 89. 

United States vs. Knox, opinion of 
Supreme Court in, quoted, 235, 
236. 

Waldo, George E., colloquies of 
author with, 349-350, 357-358, 
393-394, 398-400; 330, 346, 352, 
388, 391, 393, 394. 

Watered stock. See Stock. 

Wealth, merit, and in motion, dis- 
tinction between, 66; power of, 66. 

Weeks, John W., 330, 348, 395, 397, 
398. 

Wickersham, George W., Atty.- 
Gen., 57. 

Wilson, Woodrow, President of 
U.S., his Mexican policy ap- 
proved, 125. 

Worcester, Dean C, quoted, on 
conditions in Philippines, 105. 



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